Bulldog Inc. purchased a leather-cutting machine seven years ago. The cost of the machine was $11,200. It was epected to be used for 10 years. The machine has been depreciated on a straight-line basis with an estimated salvage value of $1,200. The machine can be sold for $3,500 today.
Bulldog is considering the purchase of a new leather-cutting machine to replace exisiting machine. Having the new machine will result in an increase of revenue $13,000, but the operating costs will also increase by $6,000 for 3 years. The new machine cost $14,000, with an expected salvage of $2,000 at the end of the third year. The new machine will be depreciated using MACRS method, and is considered a 3-year property. There will be an increase of $1,600 in net working capital. Gorilla's tax rate is 40% and cost of capital is 16%.
A. compute the depreciation for the old machine and the new machine as well as the incremental depreciation for each of the new 3 years.
b. What is the book value of the old machine today? Show work.
c. What is the tax consequence of the sale of the old machine today?show work.
d. What is the after-tax selling price of the old machine? show work'
e.. What is the net initial investment for the new machine? show work
f. The expected after-tax salvage value of the new machine is $1,620. Compute the expected net cash flow at the end of year 3. (Note: You are asked to find CF3 only, not NPV) show work