GotQ
Mar 25, 2007, 10:50 PM
I am preparing a test by going through some practice questions. Here is one I can't understand how to get the answers:
Maxgo Company is considering replacing its current computer system. The new system would cost Maxgo $60,000 to have it installed and operational. It would have an expected useful life of four years and an estimated salvage value of $12,000. The system would be depreciated on a straight-line basis for financial statement reporting purposes and use the Modified Accelerated Cost Recovery System (MACRS) depreciation method for income tax reporting purposes. Assume that the percentages of depreciation for MACRS are 25%, 40%, 20%, and 15% for the four-year life of the new computer.
Maxgo's current computer system has been fully depreciated for both financial statement and income tax reporting purposes. It could be used for four more years but not as effectively as the new computer system. The old system currently has an estimated salvage value of $8,000 and will have an estimated salvage value of $1,000 in four years. It is estimated that the new system will save $15,000 per year in operating costs. Also, because of features of the new software, working capital could immediately be reduced by $3,000 if the new system is purchased. Maxgo expects to have an effective income tax rate of 30 percent for the next four years.
Question#1: Assuming that Maxgo Company purchases the new system, determine the estimated net cash flow for the fourth (last) year of using the new system.
How come the answer is $17900???
Question#2: For Maxgo Company, determine the net incremental investment (i.e. net cash outflow in year 0) if the new computer system is purchased.
How come the answer is $51,400???
The exam is approaching. I need all the help. Please help me... Thanks!
Maxgo Company is considering replacing its current computer system. The new system would cost Maxgo $60,000 to have it installed and operational. It would have an expected useful life of four years and an estimated salvage value of $12,000. The system would be depreciated on a straight-line basis for financial statement reporting purposes and use the Modified Accelerated Cost Recovery System (MACRS) depreciation method for income tax reporting purposes. Assume that the percentages of depreciation for MACRS are 25%, 40%, 20%, and 15% for the four-year life of the new computer.
Maxgo's current computer system has been fully depreciated for both financial statement and income tax reporting purposes. It could be used for four more years but not as effectively as the new computer system. The old system currently has an estimated salvage value of $8,000 and will have an estimated salvage value of $1,000 in four years. It is estimated that the new system will save $15,000 per year in operating costs. Also, because of features of the new software, working capital could immediately be reduced by $3,000 if the new system is purchased. Maxgo expects to have an effective income tax rate of 30 percent for the next four years.
Question#1: Assuming that Maxgo Company purchases the new system, determine the estimated net cash flow for the fourth (last) year of using the new system.
How come the answer is $17900???
Question#2: For Maxgo Company, determine the net incremental investment (i.e. net cash outflow in year 0) if the new computer system is purchased.
How come the answer is $51,400???
The exam is approaching. I need all the help. Please help me... Thanks!