Mankin Company purchased a special machine 1 year ago for $10,000. At that time, the machine was estimated to have a useful life of 7 years with a $500 salvage value. A MACRS tax deduction of $2,000 was taken in the year of acquisition. The annual cash operating cost is $20,000.
A new machine that has just come on the market will do the same job but with an annual cash operating cost of only $16,400. This new machine costs $18,000 and has an estimated life of 6 years with no expected salvage value. The old machine can be used as a trade-in at an allowance of $9,000. The tax basis of the old machine is $8,000.
Both old and new machines qualify as 5-year property under MACRS, and the income tax rate is 40%.
Required:
Compute the after-tax periodic cash inflows available from the purchase of the new machine, and determine the excess of periodic net cash inflows over the initial cash outlay. (Use the MACRS depreciation rates provided in Exhibit 22-4 to compute tax depreciation.)