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Al-Huda Inc
Al-Huda Inc. want to replace an old asset with a new one. The new asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a 5-year recovery period. The old asset, which originally cost $25,000 and will be sold for $10,000, has been depreciated using MACRS 5-year recovery period and three years of depreciation have already been taken. The new asset is expected to result in incremental before tax net profits of $15,000 per year. The firm has a 40 percent tax rate ut of The book value of the existing asset Choose... The annual incremental after-tax cash flow from operations for year 1 Choose... The Initial cashflow equals Choose... The tax effect on the sale of the old asset Choose..
Expert Solution
Answer : Calculation of Book Value of Existing asset :
Below is the Table showing Calculation of Book Value of Existing Asset :
| Year | Opening Book Value | Depreciation(25000 * Depreciation Rate) | Closing Book Value |
| 1 | 25000 | 5000 [25000 * 20%] | 20000 |
| 2 | 20000 | 8000 [25000 * 32%] | 12000 |
| 3 | 12000 | 4800 [25000 * 19.2%] | 7200 |
The book Value of Existing Asset = 7200
Annual Incremental After Tax Cash Flows for year 1 = Annual Before Tax cash Flows * (1 - Tax rate)
= 15000 * (1 - 0.40)
= 9000
Initial Cash Flow = New asset Cost + Installation Cost - Sale of Existing System - Tax Effect on Sale of Existing Asset
= -50000 - 30000 + 10000 - 1120
= -71120
Tax Effect on Sale of Existing System = (Salvage Value - Book Value) * Tax rate
= (10000 - 7200) * 40%
= 1120
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