PROBLEM 3. Replacement ProjectAtlantic Control Company (ACC) purchased a machine two years ago at a cost of $70,000. At that time, themachine's expected economic life was six years and its salvage value at the end of its life was estimated to be$10,000. It is being depreciated using the straight-line method so that its book value at the end of six years is$10,000. In four years, however, the old machine will have a market value of $0.A new machine can be purchased for $80,000, including shipping and installation costs. The new machine has aneconomic life estimated to be four years. MACRS depreciation will be used, and the machine will be depreciatedover its 3-year class life rather than its five-year economic life. During its four-year life, the new machine willreduce cash operating expenses by $20,000 per year. Sales are not expected to change. But the new machine willrequire net working capital to be increased by $4,000. At the end of its useful life, the machine is estimated tohave a market value of $2,500. The old machine can be sold today for $20,000. The firm's marginal tax rate is 40percent.a) If the new machine is purchased, what is the amount of the initial investment outlay at Year O?b)What incremental operating cash flows will occur at the end of Years 1 through 4 as a result of replacingthe old machine?c) What is the terminal cash flow at the end of Year 4 if the new machine is purchased?d) What are the annual net cash flows during the project's useful life?

After tax salvage value is calculated as shown below.

Answered: Atlantic Control Company (ACC)…

Excel Applications for Accounting Principles

4th Edition

ISBN:9781111581565

Author:Gaylord N. Smith

Publisher:Gaylord N. Smith

Chapter9: Depreciation (deprec)

Section: Chapter Questions

Problem 1R: Dunedin Drilling Company recently acquired a new machine at a cost of 350,000. The machine has an...

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Urquhart Global purchases a building to house its administrative offices for $500,000. The best estimate of the salvage value at the time of purchase was $45,000, and it is expected to be used for forty years. Urquhart uses the straight-line depreciation method for all buildings. After ten years of recording depreciation, Urquhart determines that the building will be useful for a total of fifty years instead of forty. Calculate annual depreciation expense for the first ten years. Determine the depreciation expense for the final forty years of the assets life, and create the journal entry for year eleven.
Montello Inc. purchases a delivery truck for $25,000. The truck has a salvage value of $6,000 and is expected to be driven for 125,000 miles. Montello uses the units-of-production depreciation method, and in year one the company expects the truck to be driven for 26,000 miles; in year two, 30,000 miles; and in year three, 40,000 miles. Consider how the purchase of the truck will impact Montellos depreciation expense each year and what the trucks book value will be each year after depreciation expense is recorded.
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Dunedin Drilling Company recently acquired a new machine at a cost of 350,000. The machine has an estimated useful life of four years or 100,000 hours, and a salvage value of 30,000. This machine will be used 30,000 hours during Year 1, 20,000 hours in Year 2, 40,000 hours in Year 3, and 10,000 hours in Year 4. Dunedin buys equipment frequently and wants to print a depreciation schedule for each assets life. Review the worksheet called DEPREC that follows these requirements. Since some assets acquired are depreciated by straight-line, others by units of production, and others by double-declining balance, DEPREC shows all three methods. You are to use this worksheet to prepare depreciation schedules for the new machine.
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The Erley Equipment Company purchased a machine 5 years ago at a cost of $100,000. The machine had an expected life of 10 years at the time of purchase, and an expected salvage value of $10,000 at the end of the 10 years. It is being depreciated by the straight-line method toward a salvage value of $10,000, or by $9,000 per year. Anew machine can be purchased for $150,000, including installation costs. During its 5- year life, it will reduce cash operating expenses by $50,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life so the applicable depreciation rates are 33 percent, 45 percent, 15 percent, and 7 percent. The old machine can be sold today for $65,000. The firm’s tax rate is 35 percent. The appropriate discount rate is 16 percent. a. If the new machine is purchased, what is…
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