Replacement of a machine, income taxes, sensitivity. (CMA, adapted) The Kuhl Brothers own a frozen custard ice cream shop. The brothers currently are using a machine that has been in use for the last 4 years. On January 1, 2017, the Kuhl Brothers are considering buying a new machine to make their frozen custard. The Kuhl Brothers have two options: (1) continue using the old freezing machine or (2) sell the old machine and purchase a new freezing machine. The seller of the new machine is not interested in a trade- in of Kuhl's old machine. The following information has been obtained: Home Insert Page Layout Formulas Data Review View в Old Machine New Machine Initial cost of machines $180,000 $225,000 Useful life from acquisition date (years) 4 Terminal disposal value at the end of useful life on Dec. 31, 2021 (for depreciation purposes) 5 Expected annual cash operating costs: Variable cost per serving Total fixed costs 8 Depreciation method for tax purposes 9 Estimated disposal value of machines: January 1, 2017 December 31, 2021 $ 13,500 $ 20,000 $ 0.50 $ 12,000 Straight line $ 0.40 $ 8,000 Straight line 6 $ 75,000 $225,000 $ 18,000 240,000 10 $ 10,000 11 12 Expected servings made and served 240,000 The Kuhl Brothers are subject to a 25% income tax rate. Any gain or loss on the sale of machines is treated as an ordinary tax item and will affect the taxes paid by the Kuhl Brothers in the year in which it occurs. The Kuhl Brothers have an after-tax required rate of return of 8%. Assume all cash flows occur at year-end except for initial investment amounts.
Replacement of a machine, income taxes, sensitivity. (CMA, adapted) The Kuhl Brothers own a frozen custard ice cream shop. The brothers currently are using a machine that has been in use for the last 4 years. On January 1, 2017, the Kuhl Brothers are considering buying a new machine to make their frozen custard. The Kuhl Brothers have two options: (1) continue using the old freezing machine or (2) sell the old machine and purchase a new freezing machine. The seller of the new machine is not interested in a trade- in of Kuhl's old machine. The following information has been obtained: Home Insert Page Layout Formulas Data Review View в Old Machine New Machine Initial cost of machines $180,000 $225,000 Useful life from acquisition date (years) 4 Terminal disposal value at the end of useful life on Dec. 31, 2021 (for depreciation purposes) 5 Expected annual cash operating costs: Variable cost per serving Total fixed costs 8 Depreciation method for tax purposes 9 Estimated disposal value of machines: January 1, 2017 December 31, 2021 $ 13,500 $ 20,000 $ 0.50 $ 12,000 Straight line $ 0.40 $ 8,000 Straight line 6 $ 75,000 $225,000 $ 18,000 240,000 10 $ 10,000 11 12 Expected servings made and served 240,000 The Kuhl Brothers are subject to a 25% income tax rate. Any gain or loss on the sale of machines is treated as an ordinary tax item and will affect the taxes paid by the Kuhl Brothers in the year in which it occurs. The Kuhl Brothers have an after-tax required rate of return of 8%. Assume all cash flows occur at year-end except for initial investment amounts.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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How much more or less would the recurring after-tax cash operating savings of the new machine need to be for the Kuhl Brothers to earn exactly the 8% after-tax required
Transcribed Image Text:Replacement of a machine, income taxes, sensitivity. (CMA, adapted) The Kuhl Brothers own a
frozen custard ice cream shop. The brothers currently are using a machine that has been in use for the last
4 years. On January 1, 2017, the Kuhl Brothers are considering buying a new machine to make their frozen
custard. The Kuhl Brothers have two options: (1) continue using the old freezing machine or (2) sell the old
machine and purchase a new freezing machine. The seller of the new machine is not interested in a trade-
in of Kuhl's old machine. The following information has been obtained:
Home
Insert
Page Layout
Formulas
Data
Review
View
в
Old Machine
New Machine
Initial cost of machines
$180,000
$225,000
Useful life from acquisition date (years)
4 Terminal disposal value at the end of useful life on
Dec. 31, 2021 (for depreciation purposes)
5 Expected annual cash operating costs:
Variable cost per serving
Total fixed costs
8 Depreciation method for tax purposes
9 Estimated disposal value of machines:
January 1, 2017
December 31, 2021
$ 13,500
$ 20,000
$ 0.50
$ 12,000
Straight line
$ 0.40
$ 8,000
Straight line
6
$ 75,000
$225,000
$ 18,000
240,000
10
$ 10,000
11
12 Expected servings made and served
240,000
The Kuhl Brothers are subject to a 25% income tax rate. Any gain or loss on the sale of machines is treated
as an ordinary tax item and will affect the taxes paid by the Kuhl Brothers in the year in which it occurs.
The Kuhl Brothers have an after-tax required rate of return of 8%. Assume all cash flows occur at year-end
except for initial investment amounts.
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