Meade Metals Inc is replacing an old truck with a new one. To make the change Me
ID: 2782788 • Letter: M
Question
Meade Metals Inc is replacing an old truck with a new one. To make the change Meade will purchase a $200,000 truck that it will depreciate straight-line over ten years to a $41,000 salvage value. Annual operating expenses are estimated at $80,000 including insurance, fuel and maintenance on the truck as well as the cost of a driver. Management plans to sell the truck after five years for $100,000. The old truck was purchased eight years ago for $120,000. It has been depreciated straight line based on a 10-year life and a $21,000 salvage value. The old truck's annual operating expenses are $110,000, and it has a market value of $40,000. Develop a five-year cash flow projection for this replacement project. Meade's tax rate is 40%. Total Year 5 Cash Flow = $
Explanation / Answer
FIVE YEAR CASHFLOW PROJECTION FOR THE REPLACEMENT PROJECT
working note
1.saving in operating costs = operating expense of old machine-operating exp of new machine= 110000-80000=30000
tax rate is 40%. so after tax saving on operating cost=60% 0f 30000
2. depreciation on new machine = (original cost of asset- salvage value)/ number of years
= (200000-41000)/10= 15900
depreciation on old machine= )(120000-21000)/10= 9900.Depreciation is taken for balance 2 years , since 8 yrs depreciation is already taken.
COLOUMN PARTICULARS YEAR 0 YEAR1 YEAR2 YEAR3 YEAR4 YEAR5 INVESTMENT OUTLAY 1 cost of new asset -200000 2 sale of old asset +40000 3 total net investment -160000 OPERATING INFLOWS 4 after tax saving in operating costs 18000 18000 18000 18000 18000 5 depreciation of new machine 15900 15900 15900 15900 15900 6 depreciation on old machine 9900 9900 7 incremental depreciation(col5-6) 6000 6000 15900 15900 15900 8 tax savings on incremental depreciation(col7*40%) 2400 2400 6360 6360 6360 9 net operating cashflow(col4 +col8) 20400 20400 24360 24360 24360 TERMINAL CASHFLOW 10 sale value of new machine 100000 NET CASHFLOW(col 3 + 9+10) -160000 20400 20400 24360 24360 124360