 # Replacement project question

Old equipment sale 50000 New equip cost 400000 Incremental Rev 175000 Incremental Cost 25000 Life 3 year Depreciation 3 yr MACRS 33% 45% 15% 7% End of life neq equip sold 10000 Tax rate 40% Cost of capital 20% The incremental cash flow from the project for year 3 (including sale of equipment) is closest to: a) 131200 b) 151200 c) 151800 d) 152200

CF3 = (S-C) (1-T) + TD (175 – 25)(0.6) + (400)(0.15)(0.4) = 90 + 24 = \$114. TNOCF = SalT + WCInv – T(SalT – BT) = 10 + 0 – 0.4(10 – 28) = 10 + 7.2 = \$17.2. CF3 + TNOCF = \$114 + \$17.2 = \$131.2 A?

Answer is A but i am not sure how you derived 60000 and also it says after selling it in Year 3 so i thought i should add that amount in too.

Just take 15% of 400000. MACRS work like that.

thanks, i was using the 2 year rate. So stupid.

A cf3 = (150000-36000)=114000 cf(sale) -> 10,000+0.4*(28,000-10,000)=17,200 cf3+cf(sale) = 131,200 -> A

A is what I get as well T/G

sorry for the stupid question…been long since i reviewed this reading… where did 28 come from? =(

400,000*7%

BV at the end of year 3

The problem is missing. It is a vignette and 28000 is a bookvalue or something like that. I just took the 1pm exam last week so kind of remember.

The problem i took did not have BV given but had to calculate it using the 4 year dep

cfaboston28 Wrote: ------------------------------------------------------- > CF3 = (S-C) (1-T) + TD > > (175 – 25)(0.6) + (400)(0.15)(0.4) = 90 + 24 = > \$114. > > TNOCF = SalT + WCInv – T(SalT – BT) = 10 + 0 – > 0.4(10 – 28) = 10 + 7.2 = \$17.2. > > CF3 + TNOCF = \$114 + \$17.2 = \$131.2 > > A? maybe a semantic difference: should be (delta S -delta C)(1-t)+ delta D*T why are we not considering the delta in depreciation?

The example says they are “incremental” so it is already taking the delta.

Oops, posted before I read your whole question. That is actually a valid point, there must be something in the vignette about it being fully depreciated, etc.