How do you work out the

*Computation for Tax on sale of old press??

There are a few version of this question BUT can you help? I will highlight the three figures that have changed in BOLD

Lasting Impressions Company

Lasting Impressions (LI) Company is a medium-sized commercial printer of promotional

advertising brochures, booklets, and other direct-mail pieces. The

firms major clients are ad agencies based in New York and Chicago. The typical job

is characterized by high quality and production runs of more than 50,000 units. LI

has not been able to compete effectively with larger printers because of its existing

older, inefficient presses. The firm is currently having problems meeting run length

requirements as well as meeting quality standards in a cost-effective manner.

The general manager has proposed the purchase of one of two large, six-color

presses designed for long, high-quality runs. The purchase of a new press would enable

LI to reduce its cost of labor and therefore the price to the client, putting the

firm in a more competitive position. The key financial characteristics of the old press

and of the two proposed presses are summarized in what follows.

Old press Originally purchased 3 years ago at an installed cost of $400,000, it

is being depreciated under MACRS using a 10-year recovery period. The old

press has a remaining economic life of 5 years. It can be sold today to net

$460,000 before taxes; if it is retained, it can be sold to net $150,000 before

taxes at the end of 5 years.

Press A This highly automated press can be purchased for $830,000 and will

require $40,000 in installation costs. It will be depreciated under MACRS using

a 5-year recovery period. At the end of the 5 years, the machine could be sold to

net $400,000 before taxes. If this machine is acquired, it is anticipated that the

current account changes shown in the following table would result.

Integrative Case 5

Cash 1 $ 25,400

Accounts receivable 1 120,000

Inventories 2 20,000

Accounts payable 1 35,000

Press B This press is not as sophisticated as press A. It costs $640,000 and

requires $20,000 in installation costs. It will be depreciated under MACRS (straight line method) using

a 5-year recovery period. At the end of 5 years, it can be sold to net

$330,000 before taxes. Acquisition of this press will have no effect on the firms

net working capital investment.

The firm estimates that its earnings before depreciation, interest, and taxes with

the old press and with press A or press B for each of the 5 years would be as shown

in the table at the top of the next page. The firm is subject to a 30% tax rate. The

firms cost of capital, r, applicable to the proposed replacement is 14%.

Earnings before Depreciation, Interest, and Taxes

for Lasting Impressions Companys Presses

Year Old press Press A Press B

1 $120,000 $250,000 $210,000

2 120,000 270,000 210,000

3 120,000 300,000 210,000

4 120,000 330,000 210,000

5 120,000 370,000 210,00

a. For each of the two proposed replacement presses, determine: