Managerial Finance II PBL REPORT - TASK 5

Created by:
Amelia Erfa (023100072) Fauzan Adam (023100041) Hilmy Arya (023100081)

Faculty of Economics

Trisakti University 2011

Determining Relevant Cash Flow for Kefamanus Company, Replacing an Existing Automatic Washing Machine with One of Two Newer

Step 1 Kind of task : Problem task Step 2 Main problem: Which alternative appears to be better that replacing an existing automatic washing machine with one of two newer-Toshiba or Panasonic for Kefamanus Company? Step 3 Kind of method: Topical Question List Step 4 Analyze the problems: Calculate the initial investment associated with a proposed automatic washing machine (Toshiba and Panasonic). Calculate the depreciation expense for proposed and present machine. Find the relevant operating cash inflows for New Toshiba and Panasonic automatic washing machin as a proposed and the existing machine. Determine the terminal cash flow for two newer automatic washing machines. Summarize the relevant cash flows Determine which alternative machine to be more efficient for Kefamanus Company Step 5 Learning objectives: Able to discuss the relevant cash flows Able to calculate the initial investment associated with a proposed capital expenditure. Able to find the relevant operating cash inflows associated with a proposed capital expenditure.

 Able to determine the terminal cash flow associated with a proposed capital expenditure

Step 6 Solutions:
A. New Toshiba and Existing Automatic Washing Machine New Toshiba Automatic Washing Machine (Proposed) o Cost to purchase = $ 170,000 o Installation cost = $ 15,000 o Increasing in net working capital = $ 10,000 o Net sales before taxes = $ 50,000

Existing Automatic Washing Machine (Present) o Installed cost = $ 150,000 o Sale price = $ 125,000 o Net sales before taxes = $ 10,000 o The machine is 3 years old, and o Being depreciated under MACRS using a 5-year recovery period I. Finding Initial Investment The initial investment is the relevant cash outflow for a proposed project at time zero. a. Book value = Installed cost Accumulated depreciation = $150,0000 { (20% + 32% + 19%) x $150,000} = $43,500
b. Taxes on sale of present machine (Tax rate = 40%)

Gain on sale = Sale price Book value = $125,000 - $43,500 = $81,500 Taxes = Tax rate x Gain on sale = 40% x $81,500 = $32,600 c. Initial investment for Kefamanus Company Installed cost of proposed machine= Cost of proposed machine $170,000 + Installation cost 15,000

Total installed cost-proposed $185,000 - After-tax proceeds from sale of present machine= Proceeds from sale of present machine $125,000 - Tax on sale of present machine (32,600) Total after-tax proceeds-present (92,400) +Change in net working capital 10,000 Initial investment $102,600 II.Finding Operating Cash Inflows Operating cash inflows is the incremental after-tax cash inflows resulting from implementation of a project during its life. a. Calculation of Depreciation Expense of Kefamanus Company Year Cost Applicable MACRS depreciation percentage 20% 32 19 12 12 5 100% 12% (year-4 depreciation) 12 (year-5 depreciation) 5 (year-6 depreciation) Depreciation

With proposed machine 1 $185,000 2 185,000 3 185,000 4 185,000 5 185,000 6 185,000 Totals With present machine 1 $150,000 2 3 Totals 150,000 150,000

$ 37,000 59,200 35,150 22,200 22,200 9,200 $185,000 $ 18,000 18,000 7,500 $ 43,500

b. Calculation of Operating Cash Inflows for Kefamanus Company 1 With proposed machine Earnings before depre., int., and taxes - Depreciation Earnings before int. and taxes - Taxes (T = 40%) Net operating profit after taxes + Depreciation Operating cash inflows $ 75,000 37,000 $ 38,000 2 $ 75,000 59,200 $ 15,800 15,200 $ 22,800 6,320 $ 9,480 Year 3 $75,00 0 35,15 0 $39,85 0 15,94 0 $23,91 4 $75,00 0 22,20 0 $52,80 0 21,12 0 $31,68 5 $75,00 0 22,20 0 $52,80 0 21,12 0 $31,68 6 $ 0 9,25 0 ($9,25 0) (3,70 0) ($5,55

37,000 $ 59,800 With present machine Earnings before depre., int., and taxes - Depreciation Earnings before int. and taxes - Taxes (T = 40%) Net operating profit after taxes + Depreciation Operating cash inflows

59,20 0 $ 68,680 $46,000 18,000 $28,000

0 35,15 0 $59,0 60 $45,00 0 7,50 0 $37,50 0 15,00 0 $22,50 0 7,50 0 $30,0 00 Inflows

0 22,20 0 $53,8 80 $38,00 0 0 $38,00 0 15,20 0 $22,80 0

0 22,20 0 $53,8 80 $35,00 0 0 $35,00 0 14,00 0 $21,00 0

0) 9,250 $3,70 0 $ 0 0 $ 0 0 $ 0 0

$54,000 18,000 $36,000

14,400 $21,60 0 18,000 $39,600

11,200 $16,800 18,000

$34,80 0 c. Incremental (Relevant) Operating Cash Company Year 1 2 3 4 5 6 Proposed machine $ 59,800 68,680 59,060 53,880 53,880 3,700

0 0 $22,8 $21,0 00 00 for Kefamanus

Operating Cash Inflows Present Incremental machine (Relevant) $ 39,600 $ 20,200 34,800 33,880 30,000 29,060 22,800 31,080 21,000 32,880 0 3,700

III. Finding Terminal Cash Flow Terminal cash flow is the after-tax non operating cash flow occuring in the final year ofa project and it is usually attributable to liquidation of the project. a. Proposed machine Book value = Installed cost Accumulated depreciation = $185,0000 { (20% + 32% + 19% +12% + 12%) x $185,000} = $9,250 Gain on sale = Sale price Book value = $50,000 - $9,250 = $40,750

 Taxes on sale (Tax rate = 40%) Taxes = Tax rate x Gain on sale = 40% x $40,750 = $16,300 b. Present machine Book value = Installed cost Accumulated depreciation =$0 Because there is no depreciation at the end of 5 years (year-6 depreciation) Gain on sale = Sale price Book value = $10,000 - $0 = $10,000 Taxes on sale (Tax rate = 40%) Taxes = Tax rate x Gain on sale = 40% x $10,000 = $4,000

c. Terminal Cash Flow for Kefamanus Company After-tax proceeds from sale of proposed machine = Proceeds from sale of proposed machine $50,000 - Tax on sale of proposed machine 16,300 Total after-tax proceeds-proposed $33,700
- After-taxk proceeds from sale of present machine =

$10,000

Proceeds from sale of present machine - Tax on sale of present machine Total after-tax proceeds-present +Change in net working capital Terminal cash flow

4,000 (6,000) 10,000 $37,700

IV.

Summary of Cash Flows End of Year 0 1 2 3 4 5 Cash Flow -$102,600 + 20,200 + 33,880 + 29,060 + 31,080 + 70,580

Totals

$ 82,120

$32,880 Cash Inflow $37,700 Cash Flow $20,200 Flow $33,880 $29,060 $31,080 $70,580

Operating Terminal Total Cash

1 $102,600

B.New Panasonic and Existing Automatic Washing Machine New Panasonic Automatic Washing Machine (Proposed) o Cost to purchase = $ 185,000 o Installation cost = $ 10,000 o Increasing in net working capital = $ 12,500 o Net sales before taxes = $ 75,000 Existing Automatic Washing Machine (Present) o Installed cost = $ 150,000 o Sale price = $ 125,000 o Net sales before taxes = $ 10,000 o The machine is 3 years old, and o Being depreciated under MACRS using a 5-year recovery period I. Finding Initial Investment The initial investment is the relevant cash outflow for a proposed project at time zero. a. Book value = Installed cost Accumulated depreciation = $150,0000 { (20% + 32% + 19%) x $150,000} = $43,500

b. Taxes on sale of present machine (Tax rate = 40%) Gain on sale = Sale price Book value = $125,000 - $43,500 = $81,500 Taxes = Tax rate x Gain on sale = 40% x $81,500 = $32,600 c. Initial investment for Kefamanus Company Installed cost of proposed machine= Cost of proposed machine $185,000 + Installation cost 10,000 Total installed cost-proposed $195,000 - After-tax proceeds from sale of present machine= Proceeds from sale of present machine $125,000 - Tax on sale of present machine (32,600) Total after-tax proceeds-present (92,400) +Change in net working capital 12,500 Initial investment $115,100 II.Finding Operating Cash Inflows Operating cash inflows is the incremental after-tax cash inflows resulting from implementation of a project during its life. a. Calculation of Depreciation Expense of Kefamanus Company Year Cost Applicable MACRS depreciation percentage 20% 32 19 12 12 5 100% 12% (year-4 depreciation) 12 (year-5 depreciation) 5 (year-6 depreciation) Depreciation

With proposed machine 1 $195,000 2 195,000 3 195,000 4 195,000 5 195,000 6 195,000 Totals With present machine 1 $150,000 2 3 Totals 150,000 150,000

$ 39,000 62,400 37,050 23,400 23,400 9,750 $195,000 $ 18,000 18,000 7,500 $ 43,500

b. Calculation of Operating Cash Inflows for Kefamanus Company 1 With proposed machine Earnings before depre., int., and taxes - Depreciation Earnings before int. and taxes - Taxes (T = 40%) Net operating profit after taxes + Depreciation Operating cash inflows $ 86,000 39,000 $ 47,000 2 $ 78,000 62,400 $ 15,600 18,800 $ 28,200 39,000 $ 67,200 6,240 $ 9,360 62,40 0 $ 71,760 Year 3 $ 68,000 37,050 $ 30,950 12,380 $ 18,570 37,050 $ 55,62 0 $45,00 0 7,50 0 $37,50 0 15,00 0 $22,50 0 7,50 0 $30,0 00 Inflows 4 $ 60,000 23,4 00 $ 36,600 14,6 40 $ 21,960 23,4 00 $ 45,36 0 $38,00 0 0 $38,00 0 15,20 0 $22,80 0 5 $52,00 0 23,40 0 $28,60 0 11,44 0 $17,16 0 23,40 0 $40,5 60 6 $ 0 9,750 ($9,75 0) (3,90 0) ($5,85 0) 9,750 $3,90 0

With present machine Earnings before depre., int., and taxes - Depreciation Earnings before int. and taxes - Taxes (T = 40%) Net operating profit after taxes + Depreciation Operating cash inflows

$54,000 18,000 $36,000

$46,000 18,000 $28,000

$35,00 0 0 $35,00 0 14,00 0 $21,00 0

0 0

0 0

14,400 $21,60 0 18,000 $39,600

11,200 $16,800 18,000

0 0

$34,80 0 c. Incremental (Relevant) Operating Cash Company Year 1 2 3 4 Proposed machine $ 67,200 71,760 55,620 45,360

0 0 $22,8 $21,0 00 00 for Kefamanus

Operating Cash Inflows Present Incremental machine (Relevant) $ 39,600 $ 27,600 34,800 36,960 30,000 25,620 22,800 22,560

5 6

40,560 3,900

21,000 0

19,560 3,900

III. Finding Terminal Cash Flow Terminal cash flow is the after-tax non operating cash flow occuring in the final year ofa project and it is usually attributable to liquidation of the project. a. Proposed machine Book value = Installed cost Accumulated depreciation = $195,0000 { (20% + 32% + 19% +12% + 12%) x $195,000} = $9,750 Gain on sale = Sale price Book value = $75,000 - $9,750 = $65,250 Taxes on sale (Tax rate = 40%) Taxes = Tax rate x Gain on sale = 40% x $65,250 = $26,100 b. Present machine Book value = Installed cost Accumulated depreciation =$0 Because there is no depreciation at the end of 5 years (year-6 depreciation) Gain on sale = Sale price Book value = $10,000 - $0 = $10,000 Taxes on sale (Tax rate = 40%) Taxes = Tax rate x Gain on sale = 40% x $10,000 = $4,000

c. Terminal Cash Flow for Kefamanus Company After-tax proceeds from sale of proposed machine = Proceeds from sale of proposed machine $75,000 - Tax on sale of proposed machine 26,100 Total after-tax proceeds-proposed $48,900

- After-taxk proceeds from sale of present machine = $10,000 Proceeds from sale of present machine 4,000 - Tax on sale of present machine Total after-tax proceeds-present (6,000) +Change in net working capital 12,500 Terminal cash flow $55,400 IV. Summary of Cash Flows End of Year 0 1 2 3 4 5 Totals Cash Flow -$115,100 + 27,600 + 36,960 + 25,620 + 22,560 + 74,960 $ 72,600

$19,560 Cash Inflow $55,400 Cash Flow $27,600 Flow $36,960 $25,620 $22,560 $74,960

Operating Terminal Total Cash

1 $115,100