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.If Ripstart expects to sell the new machine at the end of year 5 for $40,000, compute the net cash flow in the fifth year.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 company does get to take the full benefit of year 5 depreciation.

Question

Quizplus · Accepted Answer

Dep₅ = 245,000(0.0893) = 21,878.50
Book value at the end of year 5 = $245,000 - $245,000(0.7769) = $54,659.50
NCF₅ = ($55,000 - $20,000 - $21,878.50)(1 - 0.4) + $21,878.50 + $40,000 + ($54,659.50 - $40,000)0.4
= $7,872.90 + $61,878.50 + $5,863.80 = $75,615.20

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