Acme Company officials are considering the replacement of its Allendale facility. If the decision is made to replace the Allendale Works, the building at that location will be sold. It can be sold for $300,000 net of taxes.
A new building in Grand Rapids will cost $750,000. Another $50,000 must be spent on modifications. Because the new building is closer to Acme’s customer base, Acme will save $75,000 each year if the Allendale Works is replaced. For capital budgeting purposes, Acme assigns a useful life of 10 years to the new building. At the end of the 10th year, the new building can be sold for $1million.
Depreciation amounts for years 1 through 10 are:
Yearly Depreciation:
1) 24k 2) 24k 3) 24k
4) 16k 5) 16k 6) 16k
7) 8k 8) 8k 9) 8k
10)8k
Acme’s marginal income tax rate is 40%. The company has an 11% cost of capital, and the maximum acceptable payback period is 3 years.
Fill in the table below showing each year’s cash flow:
End of Year A-T Cash
0 _________
1 _________
2 _________
3 _________
4 _________
5 _________
6 _________
7 _________
8 _________
9 _________
10 _________
I really appreciate the help everyone.
Chris
To fill in the table showing each year's cash flow, we need to consider the various cash inflows and outflows associated with the replacement of the Allendale facility with the new building in Grand Rapids.
Year 0: The net proceeds from selling the Allendale Works building is $300,000. However, this amount should be adjusted for taxes. Let's assume a tax rate of 40%. The after-tax cash flow from selling the building would be $300,000 - ($300,000 * 0.40) = $180,000.
Year 1: The cash outflow in Year 1 is the cost of the new building in Grand Rapids, which is $750,000.
Year 2 to Year 10: The cash flow for these years will consist of the savings generated from being closer to the customer base, along with the depreciation expense.
The annual savings from being closer to the customer base is $75,000.
The depreciation expense for each year is as follows:
Year 1 to Year 3: $24,000
Year 4 to Year 6: $16,000
Year 7 to Year 10: $8,000
Since depreciation is a non-cash expense, it does not directly impact cash flow. However, it does have an indirect effect on taxes paid.
To calculate the after-tax cash flow for each year, we need to determine the tax savings from the depreciation. The tax savings can be calculated as depreciation expense multiplied by the tax rate (40%).
Year 1 to Year 3: Tax savings = $24,000 * 0.40 = $9,600
Year 4 to Year 6: Tax savings = $16,000 * 0.40 = $6,400
Year 7 to Year 10: Tax savings = $8,000 * 0.40 = $3,200
To calculate the after-tax cash flow, add the annual savings from being closer to the customer base and the tax savings from depreciation to determine the net cash flow for each year:
Year 1: -$750,000 (cost of new building)
Year 2: $75,000 (annual savings) + $9,600 (tax savings)
Year 3: $75,000 (annual savings) + $9,600 (tax savings)
Year 4: $75,000 (annual savings) + $6,400 (tax savings)
Year 5: $75,000 (annual savings) + $6,400 (tax savings)
Year 6: $75,000 (annual savings) + $6,400 (tax savings)
Year 7: $75,000 (annual savings) + $3,200 (tax savings)
Year 8: $75,000 (annual savings) + $3,200 (tax savings)
Year 9: $75,000 (annual savings) + $3,200 (tax savings)
Year 10: $75,000 (annual savings) + $3,200 (tax savings)
So, the table showing each year's cash flow would be as follows:
End of Year A-T Cash
0 $180,000
1 -$750,000
2 $84,600
3 $84,600
4 $81,400
5 $81,400
6 $81,400
7 $78,200
8 $78,200
9 $78,200
10 $78,200