Integrative-Determining net cash flows Atlantic Drydock is replacing an existing hoist and is considering one of two newer, more efficient pieces of equipment. The existing hoist is 3 years old, cost $32,500, and is being deprecated under MACRS using a 5-year recovery period. Although the existing hoist has only 3 years (years 4, 5, and 6) of depreciation remaining under MACRS, it has a remaining usable life of 5 years. Hoist A, one of the two possible replacement hoists, costs $39,700 to purchase and $8,100 to install. It has a 5-year usable life and will be depreciated under MACRS using a 5-year recovery period. Hoist B costs $53,500 to purchase and $5,700 to install. It also has a 5-year usable life and will be depreciated under MACRS using a 5-year recovery period. Increased investments in net working capital will accompany the decision to acquire hoist A or hoist B. Purchase of hoist A would result in a $3,800 increase in net working capital; hoist B would result in a $6,100 increase in net working capital. The projected earnings before depreciation, interest, and taxes with each alternative hoist and the existing hoist are given in the following table The existing hoist can currently be sold for S18,500 and will not incur any removal or cleanup costs. At the end of 5 years, the existing hoist can be sold to net $1,200 before taxes. Hoists A and B can be sold to net $11,500 and $20,200 before taxes, respectively, at the end of the 5-year period (See MACRS table 1). The firm is subject to a 40% tax rate. a. Calculate the initial investment associated with each alternative. Data Table b. Calculate the incremental operating cash flows associated with each alternative. (Note: Be sure to consider the depreciation in year 6.) c. Calculate the terminal cash flow at the end of year 5 associated with each alternative. d. Depict on a time line the relevant cash flows associated with each alternative. (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet) i Data Table Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year (Click on the icon located on the top-right corner of the data table below in order to copy its Recovery year 3 years 5 years 7 years contents into a spreadsheet.) 1 33% % 20% 14% 10% 2 45% 32% 25% 18% Earnings before 3 15% 19% 18% 14% depreciation, Interest, and taxes 4 7% 12% 12% 12% Year With holst A With hoist B With existing holst 5 12% 9% 9% 1 $21,000 $21,400 $15,000 6 6 5% 996 8% 2 21.000 23,800 15,000 7 9% 79 3 21,000 25,100 15,000 8 695 4 21.000 25,100 15,000 9 6% 5 21,000 25,100 15,000 10 6% 11 493 Totals 100% 100% Done 100% 100% Print Clear All 10 years Integrative-Determining net cash flows Atlantic Drydock is replacing an existing hoist and is considering one of two newer, more efficient pieces of equipment. The existing hoist is 3 years old, cost $32,500, and is being deprecated under MACRS using a 5-year recovery period. Although the existing hoist has only 3 years (years 4, 5, and 6) of depreciation remaining under MACRS, it has a remaining usable life of 5 years. Hoist A, one of the two possible replacement hoists, costs $39,700 to purchase and $8,100 to install. It has a 5-year usable life and will be depreciated under MACRS using a 5-year recovery period. Hoist B costs $53,500 to purchase and $5,700 to install. It also has a 5-year usable life and will be depreciated under MACRS using a 5-year recovery period. Increased investments in net working capital will accompany the decision to acquire hoist A or hoist B. Purchase of hoist A would result in a $3,800 increase in net working capital; hoist B would result in a $6,100 increase in net working capital. The projected earnings before depreciation, interest, and taxes with each alternative hoist and the existing hoist are given in the following table The existing hoist can currently be sold for S18,500 and will not incur any removal or cleanup costs. At the end of 5 years, the existing hoist can be sold to net $1,200 before taxes. Hoists A and B can be sold to net $11,500 and $20,200 before taxes, respectively, at the end of the 5-year period (See MACRS table 1). The firm is subject to a 40% tax rate. a. Calculate the initial investment associated with each alternative. Data Table b. Calculate the incremental operating cash flows associated with each alternative. (Note: Be sure to consider the depreciation in year 6.) c. Calculate the terminal cash flow at the end of year 5 associated with each alternative. d. Depict on a time line the relevant cash flows associated with each alternative. (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet) i Data Table Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year (Click on the icon located on the top-right corner of the data table below in order to copy its Recovery year 3 years 5 years 7 years contents into a spreadsheet.) 1 33% % 20% 14% 10% 2 45% 32% 25% 18% Earnings before 3 15% 19% 18% 14% depreciation, Interest, and taxes 4 7% 12% 12% 12% Year With holst A With hoist B With existing holst 5 12% 9% 9% 1 $21,000 $21,400 $15,000 6 6 5% 996 8% 2 21.000 23,800 15,000 7 9% 79 3 21,000 25,100 15,000 8 695 4 21.000 25,100 15,000 9 6% 5 21,000 25,100 15,000 10 6% 11 493 Totals 100% 100% Done 100% 100% Print Clear All 10 years