BÀI TẬP ÁP DỤNG

1. Book value, taxes, and initial investment Irvin Enterprises is considering the purchase of
a new piece of equipment to replace the current equipment. The new equipment costs
$75,000 and requires $5,000 in installation costs. It will be depreciated under strangt line
using a 5-year recovery period. The old piece of equipment was purchased 4 years ago
for an installed cost of $50,000; it was being depreciated under strangt line using a 5-year
recovery period. The old equipment can be sold today for $55,000 net of any removal or
cleanup costs. As a result of the proposed replacement, the firm’s investment in net
working capital is expected to increase by $15,000. The firm pays taxes at a rate of 40%
on both ordinary income and capital gains
a. Calculate the book value of the old piece of equipment.
b. Determine the taxes, if any, attributable to the sale of the old equipment.
c. Find the initial investment associated with the proposed equipment replacement.
Solution

cost of asset
The average annual rate of depreciation =
Dep. period
Istanlled cost of new assets = $75.000 + $5.000 = $80.000
Apply the fomular above we have :
The average annual rate of Dep. = $50000 / 5 = $10.000
So, the recovery Dep after 4 years = $10.000 x 4 = $40.000
Book value = $50.000 - $40.000 = $10.000
Capital gain = $55.000 - $50.000 = $5000
We have the table calculation about the tax:
Items Amount Rate Tax
Capital gain $5.000 40% $2.000
Recovery Dep. $40.000 40% $16.000
TOTAL $45.000 80% $18.000

So, After-tax proceeds from sale of old asset = $18.000

And follow the problems, we have the change in networking capital = $15000
So, apply the format of table 8.2 we have :
Initial investment =$80.000 - $18.000 + $15.000 = $77.000
2. A machine currently in use was originally purchased 2 years ago for $40,000. The
machine is being depreciated under MARCS using a 5-year recovery period; it has 3
years of usable life remaining. The current machine can be sold today to net $42,000 after
removal and cleanup costs. A new machine, using a 3-year MARCS recovery period, can
be purchased at a price of $140,000. It requires $10,000 to install and has a 3-year usable
life. If the new machine is acquired, the investment in accounts receivable will be
expected to rise by $10,000, the inventory investment will increase by $25,000, and
accounts payable will increase by $15,000. Profits before depreciation and taxes are
expected to be $70,000 for each of the next 3 years with the old machine and to be
$120,000 in the first year and $130,000 in the second and third years with the new
machine. At the end of 3 years, the market value of the old machine will equal zero, but
the new machine could be sold to net $35,000 before taxes. Both ordinary corporate
income and capital gains are subject to a 40% tax.
A, Determine the initial investment associated with the proposed replacement decision.
B, Calculate the incremental operating cash inflows for years 1 to 4 associated with the
proposed replacement. (Note: Only depreciation cash flows must be considered in year
4.)
C, Calculate the terminal cash flow associated with the proposed replacement decision.
(Note: This is at the end of year 3.)
D, Depict on a time line the relevant cash flows found in parts a, b, and c that are
associated with the proposed replacement decision, assuming that it is terminated at the
end of year 3.
Solution
A, Installed cost of new asset = $140.000 + $10.000 = $150.000 (1)
 Capital gain = $42.000 - $40.000 = $2.000
Recovery Dep. throught MARCS ( đề bài có đề cập tới còn lại vòng đời là 3 năm vậy thì
máy mới chỉ recovery dep. xong 2 năm)

Years Amount MARCS Dep.

1 $40.000 20% $8.000
2 $40.000 32% $12.800
TOTAL $80.000 52% $20.800

So, Tax on sale of old assets

Items Amount Rate Tax

Capital gains $2.000 40% $800
Recovery Dep. $20.800 40% $8320
TOTAL $22.800 $9120

 Apply the fomular we see,

After-tax proceeds from sale of old asset = Proceeds from sale of old assets – Tax on sale
of old assets = $42.000 - $9120 = $32.880 (2)
Change in net working capital = $10.000 + $25.000 - $15.000 = $20.000 (3)
( acc receivable thì cộng vào còn acc payable thì trừ đi)
 (1), (2) and (3) we have Initial investment = Installed cost of new asset – After tax
proceeds from sale of old asset + change in networking capital
= $150.000 - $32.880 + $20.000 = $137.120
B, The calculation dep. of new assets (MARCS with 3 years)

Amount MARCS Dep.

$150.000 33% $49.500
$150.000 45% $67.500
$150.000 15% $22.500
$150.000 7% $10.500
TOTAL 100% $150.000

The calculation dep. of old assets (MARCS with 5 years) ( còn sử dụng đc 3 năm nữa , khấu hao
từ năm 3)

Amount MARCS Dep.

$40.000 19% $7600
$40.000 12% $4800
$40.000 12% $4800
$40.000 5% $2000
TOTAL $19.200