Question
Bulldog Inc. purchased a leather-cutting machine seven years ago. The cost of the machine was $11,200. It was epected to be used for 10 years.
Bulldog Inc. purchased a leather-cutting machine seven years ago. The cost of the machine was $11,200. It was epected to be used for 10 years. The machine has been depreciated on a straight-line basis with an estimated salvage value of $1,200. The machine can be sold for $3,500 today.
Bulldog is considering the purchase of a new leather-cutting machine to replace exisiting machine. Having the new machine will result in an increase of revenue $13,000, but the operating costs will also increase by $6,000 for 3 years. The new machine cost $14,000, with an expected salvage of $2,000 at the end of the third year. The new machine will be depreciated using MACRS method, and is considered a 3-year property. There will be an increase of $1,600 in net working capital. Gorilla's tax rate is 40% and cost of capital is 16%.
A. compute the depreciation for the old machine and the new machine as well as the incremental depreciation for each of the new 3 years.
b. What is the book value of the old machine today? Answer is $4,200, how did I get this? Show work.
c. What is the tax consequence of the sale of the old machine today? Answer is : tax savings of $280, how did I get this? show work.
D. What is the after-tax selling price of the old machine? Answer is $3,780. How did I get this> show work'
e.. What is the net initial investment for the new machine? answer is -$11,820 How did I get this>show work
F. The expected after-tax salvage value of the new machine is $1,620. Compute the expected net cash flow at the end of year 3. (Note: You are asked to find CF3 only, not NPV) Answer is $7,848.80 How did I get this >show work
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