Problem:
Company Z is considering upgrading their old machine with a new machine.
EXISTING MACHINE:
Cost = $100,000
Purchased 2 years ago
Depreciation using MACRS over 5-year recovery schedule
Current Market Value = $105,000
Five year usable life remaining
40% tax rate on ordinary and capital gains
Earnings before Depreciation and Taxes
year 1 $160,000
year 2 $150,000
year 3 $140,000
year 4 $140,000
year 5 $140,000
PROPOSED MACHINE:
Cost = $150,000
Installation = $20,000
Depreciation using MACRS over 5-year recovery schedule
5 year usable life expected
40% tax rate on ordinary and capital gains
Earnings before Depreciation and Taxes
year 1 $170,000
year 2 $170,000
year 3 $170,000
year 4 $170,000
year 5 $170,000
Summarize the incremental after-tax cash flow (relevant cash flows) for years t=0 through t=5.