Jung Min Hong:

A firm is considering investing in a new piece of equipment. The equipment would cost $500,000 and would have shipping and installation cost of $125,000. If purchased the machine would have an estimated useful life of 5 years and would be depreciated via a 5-year MACRS schedule (i.e., 20.0%, 32.0%, 19.2%, 11.5%, 11.5%, and 5.8%). Adoption of the project would also require an increase in working capital of $50,000. If the new equipment is purchased, an old piece of equipment (which is still useable for 5 more years) could be sold for $30,000. The old machine had be depreciated on a straight line basis and currently has a book value of zero.

The machine would generate annual incremental revenues of $250,000 and annual incremental expenses of $50,000. It is estimated that the machine can be sold as scrap at the end of its 5 year useful life for $80,000. The required return on projects of this nature is 14% and the firms marginal tax rate is 40%.

What is the amount of depreciation in the third year?

What is the after-tax impact of the sale of the old machine at time 0?

What is the cash flow from the project for year 1?

What is the tax liability created by the sale of the new machine at time 5?