Chapter 8 - Pearson Learning Solutions

CHAPTER 8 Capital Budgeting Cash Flows 353LG5LG5P8–14 Depreciation A firm is evaluating the acquisition of an asset that costs $64,000 andrequires $4,000 in installation costs. If the firm depreciates the asset under MACRS,using a 5-year recovery period (see Table 3.2 on page 98 for the applicable depreciationpercentages), determine the depreciation charge for each year.P8–15 Incremental operating cash inflows A firm is considering renewing its equipmentto meet increased demand for its product. The cost of equipment modifications is$1.9 million plus $100,000 in installation costs. The firm will depreciate the equipmentmodifications under MACRS, using a 5-year recovery period. (See Table 3.2on page 98 for the applicable depreciation percentages.) Additional sales revenuefrom the renewal should amount to $1.2 million per year, and additional operatingexpenses and other costs (excluding depreciation and interest) will amount to 40%of the additional sales. The firm is subject to a tax rate of 40%. (Note: Answer thefollowing questions for each of the next 6 years.)a. What incremental earnings before depreciation, interest, and taxes will resultfrom the renewal?b. What incremental net operating profits after taxes will result from the renewal?c. What incremental operating cash inflows will result from the renewal?LG5PERSONAL FINANCE PROBLEMP8–16 Incremental operating cash flows Richard and Linda Thomson operate a locallawn maintenance service for commercial and residential property. They have beenusing a John Deere riding mower for the past several years and feel it is time to buya new one. They would like to know the incremental (relevant) cash flows associatedwith the replacement of the old riding mower. The following data are available.2008935971LG5There are 5 years of remaining useful life on the old mower.The old mower has a zero book value.The new mower is expected to last 5 years.The Thomsons will follow a 5-year MACRS recovery period for the new mower.Depreciable value of the new law mower is $1,800.They are subject to a 40% tax rate.The new mower is expected to be more fuel-efficient, maneuverable, anddurable than previous models and can result in reduced operating expenses of$500 per year.The Thomsons will buy a maintenance contract that calls for annual paymentsof $120.Create and incremental operating cash flow statement for the replacement of Richardand Linda’s John Deere riding mower. Show the incremental operating cash flow forthe next 6 years.P8–17 Incremental operating cash inflows—Expense reduction Miller Corporation is consideringreplacing a machine. The replacement will reduce operating expenses (thatis, increase earnings before depreciation, interest, and taxes) by $16,000 per year foreach of the 5 years the new machine is expected to last. Although the old machinehas zero book value, it can be used for 5 more years. The depreciable value of thenew machine is $48,000. The firm will depreciate the machine under MACRS usinga 5-year recovery period (see Table 3.2 on page 98 for the applicable depreciationPrinciples of Managerial Finance, Brief Fifth Edition, by Lawrence J. Gitman. Copyright © 2009 by Lawrence J. Gitman. Published by Prentice Hall.