mk task 5

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Managerial Finance II

PBL REPORT - TASK 5

Created by:Amelia Erfa (023100072)

Fauzan Adam (023100041)

Hilmy Arya (023100081)

Faculty of Economics

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Trisakti University

2011

Determining Relevant Cash Flow for Kefamanus

Company, Replacing an Existing Automatic Washing

Machine with One of Two Newer

Step 1

Kind of task : Problem task

Step 2

Main problem:

Which alternative appears to be better that replacing an existing

automatic washing machine with one of two newer-Toshiba or Panasonic for

Kefamanus Company?

Step 3

Kind of method: Topical Question List

Step 4

Analyze the problems:

Calculate the initial investment associated with a proposed automatic

washing machine (Toshiba and Panasonic).

Calculate the depreciation expense for proposed and present machine.

Find the relevant operating cash inflows for New Toshiba and

Panasonic automatic washing machin as a proposed and the existing

machine.

Determine the terminal cash flow for two newer automatic washing

machines.

Summarize the relevant cash flows

Determine which alternative machine to be more efficient for

Kefamanus Company

Step 5

Learning objectives:

Able to discuss the relevant cash flows

Able to calculate the initial investment associated with a proposed

capital expenditure.

Able to find the relevant operating cash inflows associated with a

proposed capital expenditure.

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Total installed cost-proposed $185,000

- After-tax proceeds from sale of present machine=

Proceeds from sale of present machine $125,000

-Tax on sale of present machine (32,600)

Total after-tax proceeds-present (92,400)+Change in net working capital 10,000

Initial investment $102,600

II.Finding Operating Cash Inflows

Operating cash inflows is the incremental after-tax cash inflows resulting

from implementation of a project during its life.

a. Calculation of Depreciation Expense of Kefamanus Company

Year Cost Applicable MACRS

depreciation

percentage

Depreciation

With proposed machine

1 $185,000 20% $ 37,0002 185,000 32 59,2003 185,000 19 35,1504 185,000 12 22,2005 185,000 12 22,2006 185,000 5 9,200

Totals 100% $185,000

With present machine

1 $150,000 12% (year-4depreciation)

$ 18,000

2 150,000 12 (year-5

depreciation)

18,000

3 150,000 5 (year-6

depreciation)

7,500

Totals $ 43,500

b.Calculation of Operating Cash Inflows for Kefamanus Company

Year1 2 3 4 5 6


Earnings before depre., int.,

and taxes

- Depreciation

Earnings before int. and taxes

-Taxes (T= 40%)

Net operating profit after taxes

+ Depreciation

Operating cash inflows

$ 75,000

37,000

$ 38,000

$ 75,000 $75,00

0

$75,00

0

$75,00

0

$ 0

59,200 35,15

0

22,20

0

22,20

0

9,25

0$ 15,800 $39,85

0

$52,80

0

$52,80

0

($9,25

0)15,200 6,320 15,94

0

21,12

0

21,12

0

(3,70

0)$ 22,800 $ 9,480 $23,91 $31,68 $31,68 ($5,55

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0 0 0 0)37,000 59,20

0

35,15

0

22,20

0

22,20

0

9,250

$ 59,800 $

68,680

$59,0

60

$53,8

80

$53,8

80

$3,70

0



and taxes

- Depreciation


-Taxes (T= 40%)


+ Depreciation


$54,000

18,000

$36,000

$46,000 $45,00

0

$38,00

0

$35,00

0

$ 0

18,0 00 7,50

0

0 0

0

$28,000 $37,50

0

$38,00

0

$35,00

0

$ 0

14,4 00 11,20 0 15,00

0

15,20

0

14,00

0

0

$21,60

0

$16,800 $22,50

0

$22,80

0

$21,00

0

$ 0

18,000 18,0 00 7,50

0

0

0

0

$39,6 00 $34,80

0

$30,0

00

$22,8

00

$21,0

00

$ 0

c. Incremental (Relevant) Operating Cash Inflows for Kefamanus

Company

Operating Cash InflowsYear Proposed

machine

Present

machine

Incremental

(Relevant)1 $ 59,800 $ 39,600 $ 20,2002 68,680 34,800 33,8803 59,060 30,000 29,0604 53,880 22,800 31,0805 53,880 21,000 32,8806 3,700 0 3,700

III. Finding Terminal Cash Flow

Terminal cash flow is the after-tax non operating cash flow occuring in

the final year ofa project and it is usually attributable to liquidation of the

project.

a. Proposed machine

Book value = Installed cost Accumulated depreciation

= $185,0000 { (20% + 32% + 19% +12% + 12%) x

$185,000}

= $9,250

Gain on sale = Sale price Book value

= $50,000 - $9,250= $40,750

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Taxes on sale (Tax rate = 40%)

Taxes = Tax rate x Gain on sale

= 40% x $40,750

= $16,300

b.Present machine


= $ 0

Because there is no depreciation at the end of 5 years (year-6

depreciation)


= $10,000 - $0

= $10,000



= 40% x $10,000

= $4,000

c. Terminal Cash Flow for Kefamanus Company

After-tax proceeds from sale of proposed machine =

Proceeds from sale of proposed machine $50,000-Tax on sale of proposed machine 16,300

Total after-tax proceeds-proposed $33,700

- After-taxk proceeds from sale of present machine = $10,000

Proceeds from sale of present machine 4,000

- Tax on sale of present machine

Total after-tax proceeds-present (6,000)

+Change in net working capital 10,000

Terminal cash flow $37,700

IV. Summary of Cash Flows

End of Year Cash Flow

0 -$102,6001 + 20,2002 + 33,8803 + 29,060

4 + 31,0805 + 70,580

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Totals $ 82,120

$32,880 OperatingCash Inflow

$37,700 Terminal

Cash Flow

$20,200 $33,880 $29,060 $31,080 $70,580 Total Cash

Flow

1 2 3 4 5

$102,600

B.New Panasonic and Existing Automatic Washing Machine

New Panasonic Automatic Washing Machine (Proposed)o Cost to purchase = $ 185,000

o Installation cost = $ 10,000

o Increasing in net working capital = $ 12,500

o Net sales before taxes = $ 75,000

Existing Automatic Washing Machine (Present)

o Installed cost = $ 150,000

o Sale price = $ 125,000

o Net sales before taxes = $ 10,000o The machine is 3 years old, and

o Being depreciated under MACRS using a 5-year recovery period

I. Finding Initial Investment

The initial investment is the relevant cash outflow for a proposed project

at time zero.

a.Book value = Installed cost Accumulated depreciation

= $150,0000 { (20% + 32% + 19%) x $150,000}= $43,500

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b.Taxes on sale of present machine (Tax rate = 40%)


= $125,000 - $43,500

= $81,500


= 40% x $81,500

= $32,600

c. Initial investment for Kefamanus Company

Installed cost of proposed machine=

Cost of proposed machine $185,000

+ Installation cost 10,000

Total installed cost-proposed $195,000

- After-tax proceeds from sale of present machine=Proceeds from sale of present machine $125,000

-Tax on sale of present machine (32,600)


+Change in net working capital 12,500

Initial investment $115,100

II.Finding Operating Cash Inflows

Operating cash inflows is the incremental after-tax cash inflows resulting

from implementation of a project during its life.a.Calculation of Depreciation Expense of Kefamanus Company

Year Cost Applicable MACRS

depreciation

percentage

Depreciation


1 $195,000 20% $ 39,0002 195,000 32 62,4003 195,000 19 37,050

4 195,000 12 23,4005 195,000 12 23,4006 195,000 5 9,750

Totals 100% $195,000


1 $150,000 12% (year-4

depreciation)

$ 18,000

2 150,000 12 (year-5

depreciation)

18,000

3 150,000 5 (year-6

depreciation)

7,500

Totals $ 43,500

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b.Calculation of Operating Cash Inflows for Kefamanus Company

Year

1 2 3 4 5 6

With proposed machineEarnings before depre., int.,

and taxes

- Depreciation


-Taxes (T= 40%)


+ Depreciation


$ 86,000

39,000

$ 47,000

$ 78,000 $

68,000

$

60,000

$52,00

0

$ 0

62,400 37,050 23,4

00

23,40

0

9,750

$ 15,600 $

30,950

$

36,600

$28,60

0

($9,75

0)18,800 6,240 12,380 14,6

40

11,44

0

(3,90

0)$ 28,200 $ 9,360 $

18,570

$

21,960

$17,16

0

($5,85

0)39,000 62,40

0

37,050 23,4

00

23,40

0

9,750

$ 67,200 $

71,760

$

55,62

0

$

45,36

0

$40,5

60

$3,90

0



and taxes

- DepreciationEarnings before int. and taxes

-Taxes (T= 40%)


+ Depreciation


$54,000

18,000

$36,000

$46,000 $45,00

0

$38,00

0

$35,00

0

$ 0

18,0 00 7,500 0 0 0

$28,000 $37,50

0

$38,00

0

$35,00

0

$ 0

14,4 00 11,20 0 15,00

0

15,20

0

14,00

0

0

$21,60

0

$16,800 $22,50

0

$22,80

0

$21,00

0

$ 0

18,000 18,0 00 7,50

0

0

0

0

$39,6 00 $34,800

$30,000

$22,800

$21,000

$ 0

c. Incremental (Relevant) Operating Cash Inflows for Kefamanus

Company

Operating Cash InflowsYear Proposed

machine

Present

machine

Incremental

(Relevant)1 $ 67,200 $ 39,600 $ 27,6002 71,760 34,800 36,960

3 55,620 30,000 25,6204 45,360 22,800 22,560

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5 40,560 21,000 19,5606 3,900 0 3,900

III. Finding Terminal Cash Flow

Terminal cash flow is the after-tax non operating cash flow occuring inthe final year ofa project and it is usually attributable to liquidation of the

project.

a. Proposed machine


= $195,0000 { (20% + 32% + 19% +12% + 12%) x

$195,000}

= $9,750


= $75,000 - $9,750

= $65,250



= 40% x $65,250

= $26,100

b.Present machine

Book value = Installed cost Accumulated depreciation= $ 0

Because there is no depreciation at the end of 5 years (year-6

depreciation)


= $10,000 - $0

= $10,000


Taxes = Tax rate x Gain on sale= 40% x $10,000

= $4,000

c. Terminal Cash Flow for Kefamanus Company

After-tax proceeds from sale of proposed machine =

Proceeds from sale of proposed machine $75,000

-Tax on sale of proposed machine 26,100

Total after-tax proceeds-proposed $48,900

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- After-taxk proceeds from sale of present machine = $10,000

Proceeds from sale of present machine 4,000

- Tax on sale of present machine


+Change in net working capital 12,500Terminal cash flow $55,400

IV. Summary of Cash Flows

End of Year Cash Flow

0 -$115,1001 + 27,6002 + 36,9603 + 25,6204 + 22,5605 + 74,960

Totals $ 72,600

$19,560 Operating

Cash Inflow

$55,400 Terminal

Cash Flow

$27,600 $36,960 $25,620 $22,560 $74,960 Total CashFlow

1 2 3 4 5

$115,100

mk task 5

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