Ripstart is replacing an old, fully depreciated stamping line with a more efficient machine that will cost $245,000. The line will be depreciated as a 7-year MACRS asset. With the increased production, Ripstart expects revenues to increase by $55,000, and operating expenses to increase by $20,000. The MACRS depreciation rate during the fifth year is 8.93%, and the accumulated MACRS depreciation after five years totals 77.69 percent of the cost of the asset. Assume the firm's marginal tax rate is 40 percent and that the company does get to take the full benefit of year 5 depreciation. If Ripstart expects to sell the new machine at the end of year 5 for $40,000, what will be the net cash flow in the fifth year?

Question

Quizplus · Accepted Answer

To calculate the net cash flow in the fifth year, we need to calculate the following:

1. Operating income:
Operating income = Revenues - Operating expenses
Operating income = $55,000 - $20,000
Operating income = $35,000

2. Depreciation:
Using MACRS, the depreciation rate for year 5 is 8.93%. Therefore, depreciation for year 5 = $245,000 x 8.93% = $21,917.50

3. Tax savings:
Tax savings = Depreciation x Tax rate
Tax savings = $21,917.50 x 40%
Tax savings = $8,767

4. After-tax proceeds from the sale of the machine:
After-tax proceeds = Sale price - Book value
Book value = Cost of asset - Accumulated depreciation
Book value = $245,000 - ($245,000 x 77.69%)
Book value = $55,928.10
After-tax proceeds = $40,000 - $55,928.10 x 40%
After-tax proceeds = $9,447.86

5. Net cash flow:
Net cash flow = Operating income + Depreciation + Tax savings + After-tax proceeds
Net cash flow = $35,000 + $21,917.50 + $8,767 + $9,447.86
Net cash flow = $75,615.36

Therefore, the best choice is C.

Ripstart Is Replacing an Old, Fully Depreciated Stamping Line with a More