Assume that it is January 1, 2019, and that the Mendoza Company is considering the replacement of
Question:
Assume further that Mendoza is subject to a 40% income tax, both for ordinary income and gains/ losses associated with disposal of machinery, and that all cash flows occur at the end of the year, except for the initial investment. Assume that straight-line depreciation is used for tax purposes and that any tax associated with the disposal of machinery occurs at the same time of the related transaction.
Required
Determine the relevant cash flows (after-tax) at:
(1) time of purchase of the new machine (i.e., time 0: January 1, 2019),
(2) Determine the relevant (after-tax) cash inflow each year of project operation (i.e., at the end of each of years 1 through 5),
(3) Determine the relevant (after-tax) cash inflow at the end of the projects life (i.e., at the projects disposal time, December 31, 2023),
(4) Identify any irrelevant cost and revenue data associated with this asset-replacement decision,
(5) Determine the undiscounted net cash flow (after tax) for the new machine and determine whether on this basis the old machine should be replaced.
Step by Step Answer:
Cost Management A Strategic Emphasis
ISBN: 9781259917028
8th Edition
Authors: Edward Blocher, David F. Stout, Paul Juras, Steven Smith