Lord of Chips Inc. is planning to fully automate its current chips processing system. The management...

  

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Lord of Chips Inc. is planning to fully automate its current chips processing system. The management of the company predicts that, even without any sales change, the company will be able to acquire significant productivity gains through huge operational cost savings with being fully-automated during the next four-year period. With the proposed plan, the company expects to cease the operation of the old semi-automated processing plant, which still has four (04) years of its' useful life. This plant was acquired six years ago for $300.000. The salvage value of the old plant at the end of its 10-years useful life will be zero. However, if the automation plan is implemented now, the remainder of the old plant can be sold for $140.000. It is proposed that $600,000 is required to purchase the new machinery, and another $100,000 to install the machinery. At the end of the four-year usetule, the salvage value of the new plant is expected to be $240,000. The practice the company is to 160 15°C $100,000 to Install the machinery. At the end of the four-year useful life, the salvage value of the new plant is expected to be $240,000. The practice of the company is to depreciate the capital assets up to their salvage value during their useful life. The automation will increase the current investment in the working capital by $20,000 which can be fully recovered at the end of year four. The business is subject to a 30% tax rate. Required: 1. Tax loss or gain on the selling the old plant. (2 Points) 2. The initial cash flow on the new plant. (3 points) 3. Incremental depreciation expenses which can be claimed fir the taxes (2 Points) Paragraph V BIU A/ Initial Cash flow Lord of Chips Inc. is planning to fully automate its current chips processing system. The management of the company predicts that, even without any sales change, the company will be able to acquire significant productivity gains through huge operational cost savings with being fully-automated during the next four-year period. With the proposed plan, the company expects to cease the operation of the old semi-automated processing plant, which still has four (04) years of its' useful life. This plant was acquired six years ago for $300.000. The salvage value of the old plant at the end of its 10-years useful life will be zero. However, if the automation plan is implemented now, the remainder of the old plant can be sold for $140.000. It is proposed that $600,000 is required to purchase the new machinery, and another $100,000 to install the machinery. At the end of the four-year usetule, the salvage value of the new plant is expected to be $240,000. The practice the company is to 160 15°C $100,000 to Install the machinery. At the end of the four-year useful life, the salvage value of the new plant is expected to be $240,000. The practice of the company is to depreciate the capital assets up to their salvage value during their useful life. The automation will increase the current investment in the working capital by $20,000 which can be fully recovered at the end of year four. The business is subject to a 30% tax rate. Required: 1. Tax loss or gain on the selling the old plant. (2 Points) 2. The initial cash flow on the new plant. (3 points) 3. Incremental depreciation expenses which can be claimed fir the taxes (2 Points) Paragraph V BIU A/ Initial Cash flow

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Lord of Chips Inc Automation Analysis 1 Tax loss or gain on selling the old plant Since the salvage ... View the full answer