P11-27 Integrative: Determining net eash Bows Adantic Drydodk in consdoring replacing an edsting hoist with one of two newer, more efficient pieces of equipment The existing hoiat is 3 years old, cost $32,00o, and is being depreciated under MACRs, using S year recovery period Although the edsting holst 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 holsts, costs $40,000 to purchase and $8,000 to install. It has a 5-year usable life and will be depreciated under MACRS, using a 5 year recovery period. Hoist B costs $54,000 to purchape and $6,0OD to initall. It alao has a 5-year usable life and will be depreciated undet MACRS, using a 5 year recovery period Increased investments in net worldng capital will accompany the decision to acquire hoist A or hoist B. Purchase of hoist A would result in a $4,000 increase in net working capital: hoist B would result in a $6,000 increase in net working capital. The projected earnings before interest taxes, deprediation, and amortization with each alternative hoist and the exsting hoist are given in the following tabl Earnings before interest, taxes, depreciation, and amortization with existing hoist with hoist A $21.000 21,000 21,000 21,000 21.000 With hoist b $22,000 24,000 28,000 28,000 28.000 Year $14,000 14,000 14,000 14,000 14,000 The edsting hoist can currently be sold for $18,000 and will not incur any removal or cleanup coets. At the end of 5 years, the existing hoiat can be sold to net $1.000 before taxea. Hoists A and B can be sold to net $12,000 and $20.000 before taxes, respectively, at the end of the 5-year period. The firm is subject to a 40% tax rate. See Table 4 20 for the applicable depreciation percentages.) a. Calculate the initial investment associated with each alternative. 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 timeline the relevant cash flown associated with each P11-27 Integrative: Determining net eash Bows Adantic Drydodk in consdoring replacing an edsting hoist with one of two newer, more efficient pieces of equipment The existing hoiat is 3 years old, cost $32,00o, and is being depreciated under MACRs, using S year recovery period Although the edsting holst 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 holsts, costs $40,000 to purchase and $8,000 to install. It has a 5-year usable life and will be depreciated under MACRS, using a 5 year recovery period. Hoist B costs $54,000 to purchape and $6,0OD to initall. It alao has a 5-year usable life and will be depreciated undet MACRS, using a 5 year recovery period Increased investments in net worldng capital will accompany the decision to acquire hoist A or hoist B. Purchase of hoist A would result in a $4,000 increase in net working capital: hoist B would result in a $6,000 increase in net working capital. The projected earnings before interest taxes, deprediation, and amortization with each alternative hoist and the exsting hoist are given in the following tabl Earnings before interest, taxes, depreciation, and amortization with existing hoist with hoist A $21.000 21,000 21,000 21,000 21.000 With hoist b $22,000 24,000 28,000 28,000 28.000 Year $14,000 14,000 14,000 14,000 14,000 The edsting hoist can currently be sold for $18,000 and will not incur any removal or cleanup coets. At the end of 5 years, the existing hoiat can be sold to net $1.000 before taxea. Hoists A and B can be sold to net $12,000 and $20.000 before taxes, respectively, at the end of the 5-year period. The firm is subject to a 40% tax rate. See Table 4 20 for the applicable depreciation percentages.) a. Calculate the initial investment associated with each alternative. 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 timeline the relevant cash flown associated with each
