On January 1, 2018 Crane Company will acquire a new asset that costs $400,000 and that is anticipated to have a salvage value of $30,000 at the end of four years. The new asset:
? qualifies as three-year property under the Modified Accelerated Cost Recovery System (MACRS)
? will replace an old asset that currently has a tax basis of $80,000 and that can be sold on this date for $60,000 (net of selling costs)
? will continue to generate the same operating revenues as the old asset ($200,000 per year). However, it is predicted that savings in cash operating costs will be experienced as follows: a total of $120,000 in each of the first three years, and $90,000 in the fourth year.
Crane is subject to a combined income tax rate, t, of 40% and rounds all computations to the nearest dollar. Crane's fiscal year coincides with the calendar year. Assume that any gain or loss affects the taxes paid at the end of the year in which the gain or loss occurs. The company uses the net present value (NPV) method to analyze projects using the factors and rates presented below (based on a discount rate of 14%):
$\begin{array}{rrrr}\text { Year } & \text { PV of } \$ 1 \text { at } 14 \% & \text { PV of } \$ 1 \text { Annuity at } 14 \% & \text { MACRS } \
2018 & 0.877 & 0.877 & 33 \% \
2019 & 0.769 & 1.647 & 45 \% \
2020 & 0.675 & 2.321 & 15 \% \
2021 & 0.592 & 2.914 & 7 \%
\end{array}$The relevant discounted operating cash flows (cost savings) that should be factored into Crane Company's analysis are:
A) $31,968.
B) $167,112.
C) $199,080.
D) $206,640.
E) $209,808.

Question

On January 1, 2018 Crane Company will acquire a new asset that costs $400,000 and that is anticipated to have a salvage value of $30,000 at the end of four years. The new asset:
?	qualifies as three-year property under the Modified Accelerated Cost Recovery System (MACRS) 
?	will replace an old asset that currently has a tax basis of $80,000 and that can be sold on this date for $60,000 (net of selling costs) 
?	will continue to generate the same operating revenues as the old asset ($200,000 per year). However, it is predicted that savings in cash operating costs will be experienced as follows: a total of $120,000 in each of the first three years, and $90,000 in the fourth year. 
Crane is subject to a combined income tax rate, t, of 40% and rounds all computations to the nearest dollar. Crane's fiscal year coincides with the calendar year. Assume that any gain or loss affects the taxes paid at the end of the year in which the gain or loss occurs. The company uses the net present value (NPV) method to analyze projects using the factors and rates presented below (based on a discount rate of 14%):
$\begin{array}{rrrr}\text { Year } & \text { PV of } \$ 1 \text { at } 14 \% & \text { PV of } \$ 1 \text { Annuity at } 14 \% & \text { MACRS } \
2018 & 0.877 & 0.877 & 33 \% \
2019 & 0.769 & 1.647 & 45 \% \
2020 & 0.675 & 2.321 & 15 \% \
2021 & 0.592 & 2.914 & 7 \%
\end{array}$The relevant discounted operating cash flows (cost savings) that should be factored into Crane Company's analysis are:
A) $31,968.
B) $167,112.
C) $199,080.
D) $206,640.
E) $209,808.

Quizplus · Accepted Answer

The relevant discounted operating cash flows are calculated by discounting the cash savings for each year and summing them up: $120,000 * 0.877 + $120,000 * 0.769 + $120,000 * 0.675 + $90,000 * 0.592 = $199,080.

On January 1, 2018 Crane Company Will Acquire a New