Big-Pear Corp. is considering replacing its existing equipment that is used to produce smart cell phones....

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Big-Pear Corp. is considering replacing its existing equipmentthat is used to produce smart cell phones. This existing equipmentwas purchase 3 years ago at a base price of $60,000. Installationcosts at the time for the machine were $7,000. The existingequipment is considered a 5-year class for MACRS. The existingequipment can be sold today for $40,000 and for $20,000 in 3 years.The new equipment has a purchase price of $140,000 and is alsoconsidered a 5-year class for MACRS. Installation costs for the newequipment are $5,000. The estimated salvage value of the newequipment is $80,000. This new equipment is more efficient than theexisting one and thus savings before taxes using the new equipmentare $20,000 a year. Due to these savings, inventories will see aone time reduction of $1,000 at the time of replacement. Thecompany's marginal tax rate is 30% and the cost of capital is 12%.For this project, what is the incremental cash flow in year 2?
MACRS Fixed Annual Expense Percentages by RecoveryClass
Year 3-Year 5-Year 7-Year 10-Year 15-Year
1 33.33% 20.00% 14.29% 10.00% 5.00%
2 44.45% 32.00% 24.49% 18.00% 9.50%
3 14.81% 19.20% 17.49% 14.40% 8.55%
4 7.41% 11.52% 12.49% 11.52% 7.70%
5 11.52% 8.93% 9.22% 6.93%
6 5.76% 8.93% 7.37% 6.23%
7 8.93% 6.55% 5.90%
8 4.45% 6.55% 5.90%
9 6.56% 5.91%
10 6.55% 5.90%
11 3.28% 5.91%
12 5.90%
13 5.91%
14 5.90%
15 5.91%
16 2.95%

Answer & Explanation Solved by verified expert

4.2 Ratings (643 Votes)

Incremental cash flow in Year 2 will only consist of After tax operating cash flow from project in year 2 Total cost of existing equipment purchased three years ago Base cost installation cost 60000 7000 67000 At end of year 2 it See Answer

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Transcribed Image Text

Big-Pear Corp. is considering replacing its existing equipmentthat is used to produce smart cell phones. This existing equipmentwas purchase 3 years ago at a base price of $60,000. Installationcosts at the time for the machine were $7,000. The existingequipment is considered a 5-year class for MACRS. The existingequipment can be sold today for $40,000 and for $20,000 in 3 years.The new equipment has a purchase price of $140,000 and is alsoconsidered a 5-year class for MACRS. Installation costs for the newequipment are $5,000. The estimated salvage value of the newequipment is $80,000. This new equipment is more efficient than theexisting one and thus savings before taxes using the new equipmentare $20,000 a year. Due to these savings, inventories will see aone time reduction of $1,000 at the time of replacement. Thecompany's marginal tax rate is 30% and the cost of capital is 12%.For this project, what is the incremental cash flow in year 2?MACRS Fixed Annual Expense Percentages by RecoveryClassYear3-Year5-Year7-Year10-Year15-Year133.33%20.00%14.29%10.00%5.00%244.45%32.00%24.49%18.00%9.50%314.81%19.20%17.49%14.40%8.55%47.41%11.52%12.49%11.52%7.70%511.52%8.93%9.22%6.93%65.76%8.93%7.37%6.23%78.93%6.55%5.90%84.45%6.55%5.90%96.56%5.91%106.55%5.90%113.28%5.91%125.90%135.91%145.90%155.91%162.95%

MACRS Fixed Annual Expense Percentages by RecoveryClass
Year	3-Year	5-Year	7-Year	10-Year	15-Year
1	33.33%	20.00%	14.29%	10.00%	5.00%
2	44.45%	32.00%	24.49%	18.00%	9.50%
3	14.81%	19.20%	17.49%	14.40%	8.55%
4	7.41%	11.52%	12.49%	11.52%	7.70%
5		11.52%	8.93%	9.22%	6.93%
6		5.76%	8.93%	7.37%	6.23%
7			8.93%	6.55%	5.90%
8			4.45%	6.55%	5.90%
9				6.56%	5.91%
10				6.55%	5.90%
11				3.28%	5.91%
12					5.90%
13					5.91%
14					5.90%
15					5.91%
16					2.95%