Compute the increase in after tax annual net cash inflow
Course:- Taxation
Reference No.:- EM131146523

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Alternate problems

Alternate problem A Mark's Manufacturing Company is currently using three machines that it bought seven years ago to manufacture its product. Each machine produces 10,000 units annually. Each machine originally cost USD 25,500 and has an estimated useful life of 17 years with no salvage value.

The new assistant manager of Mark's Manufacturing Company suggests that the company replace the three old machines with two technically superior machines for USD 22,500 each. Each new machine would produce 15,000 units annually and would have an estimated useful life of 10 years with no salvage value.

The new assistant manager points out that the cost of maintaining the new machines would be much lower. Each old machine costs USD 2,500 per year to maintain; each new machine would cost only USD 1,500 a year to maintain.

Compute the increase in after-tax annual net cash inflow that would result from replacing the old machines; use straight-line depreciation and an assumed tax rate of 40 per cent.

Alternate problem B Fed Extra Company is considering replacing 10 of its delivery vans that originally cost USD 30,000 each; depreciation of USD 18,750 has already been taken on each van. The vans were originally estimated to have useful lives of eight years and no salvage value. Each van travels an average of 150,000 miles per year. The 10 new vans, if purchased, will cost USD 36,000 each. Each van will be driven 150,000 miles per year and will have no salvage value at the end of its three-year estimated useful life. A trade-in allowance of USD 3,000 is available for each of the old vans. Following is a comparison of costs of operation per mile:


Old vans

New vans

Fuel, lubricants, etc.

$ 0.152

$ 0.119










Other operating costs



Operating costs per mile

Use the payback period method for (a) and (b).

a. Do you recommend replacing the old vans? disregard all factors not related to the preceding data.

$ 0.405




$ 0.396



your  answer  with  computations and

b. If the old vans were already fully depreciated, would your answer be different? Why?

c.  Assume that all cost flows for operating costs fall at the end of each year and that 18 per cent is an appropriate rate for discountingpurposes. Using the net present value method, present a schedule showing whether or not the new vans should be acquired.

Alternate problem C Mesa Company has been using an old-fashioned computer for many years. The computer has no salvage value.The company is considering buying a computer system at a cost of USD 35,000. The new computer system will save USD 7,000 per year after taxes in cash (including tax effects of depreciation). If the company decides not to buy the new computer system, it can use the oldone for an indefinite time. The new computer system will have an estimated useful life of 10 years.

a.  Compute the time-adjusted rate of return for the new computer system.


b.  The company is uncertain about the new computer system's 10-year useful life. Compute the time-adjusted rate of return for the new computer system if its useful life is (1) 6 years and (2) 15 years, instead of 10 years.

c.  Suppose the computer system has a useful life of 10 years, but the annual after-tax cost savings are only USD 4,500. Compute the time-adjusted rate of return.

d.   Assume the annual after-tax cost savings will be USD 7,500 and the useful life will be eight years. Compute the time-adjusted rate of return.


Alternate problem D Ott's Fresh Produce Company has always purchased its trucks outright and sold them after three years. The company is ready to sell its present fleet of trucks and is trying to decide whether it should continue to purchase trucks or whether it should lease trucks. If the trucks are purchased, the company will incur the following costs:

Acquisition cost

$ 312,000



First year


Second year


Third year


Other annual costs


At the end of three years, the trucks could be sold for a total of USD 96,000. Another fleet of trucks would then be purchased. The costs just listed, including the same acquisition cost, also would be incurred with respect to the second fleet of trucks. The second fleet also could be sold for USD 96,000 at the end of three years.

If the company leases the trucks, the lease contract will run for six years. One fleet of trucks will be provided immediately, and a second fleet of trucks will be provided at the end of three years. The company will pay USD 126,000 per year under the lease contract. The first lease payment will be due on the day the lease contract is signed. The lessor bears the cost of all repairs.

Using the net present value method, determine if the company should buy or lease the trucks.


Assume the company's cost of capital is 18 per cent. (Ignore federal income taxes.)

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