1.
Determine the
1.

Explanation of Solution
Compute the cash flow after-tax at the time of purchase of new machine:
Particulars | Amount | Amount |
Incremental net | $10,000 | |
Net purchase price of new machine | $190,000 | |
Total cost (A) | $200,000 | |
Current disposal | $68,000 | |
Tax shield from deductibility of loss | $13,300 | |
After-tax | $81,300 | |
Net cash flow after-tax (A-B) | $118,700 |
Working notes
Determine the amount of tax from deduction of loss:
Determine the estimated loss on disposal of machine:
2.
Determine the after-tax cash inflow for each year.
2.

Explanation of Solution
Compute the after-tax cash inflow for each year:
Working notes:
Determine the difference in annual after tax variable cost:
Determine the difference in annual after tax fixed cost:
3.
Determine the relevant cash flow at the end of the project.
3.

Explanation of Solution
Compute the relevant cash flow at the end of the project:
Working notes:
Determine the after tax cash flow from disposal of machines:
Particulars | Old Machine | New Machine |
Original cost | $150,000 | $190,000 |
Total | $130,000 | $165,000 |
Book value of machines | $20,000 | $25,000 |
Terminal value of machines | $12,000 | $22,000 |
Gain (Loss) on disposal of machines | -$8,000 | $3,000 |
Tax savings on loss (@ 40%) | $3,200 | $1,200 |
Terminal value of machines on Dec. 31, 2023 | $12,000 | $22,000 |
After-tax cash flow from disposal of machines | $15,200 | $23,200 |
4.
Identify and indicate the relevant cost and revenue data related with asset-replacement decision:
4.

Explanation of Solution
The original cost ($150,000) of the old machine and the
5.
Determine the undiscounted net cash flow for new machine.
5.

Explanation of Solution
Particulars | Amount |
Net cash flow after-tax | -$118,700 |
Cumulative cash flow after-tax | $126,500 |
After-tax cash flow end of the project | $18,000 |
Undiscounted net cash flow | $25,800 |
Working notes
Determine the cumulative cash flow tax:
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Chapter 12 Solutions
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