Yam-Hash Corporation currently uses a water purification machine that was purchased 2 years ago. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is Rs.2,100, and it can be sold for Rs.2,500 at this time. If old machine is not replaced, then it can be sold for Rs.500 at the end of its useful life. Yam-Hash is offered a replacement machine that has a cost of Rs.8,000, an estimated useful life of 6 years, and an estimated salvage value of Rs.800. This machine falls into the MACRS 5-year class, so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The replacement machine is expected to save Rs.300 per year. The new machine would require that inventories be increased by Rs.2,000, but accounts payable would simultaneously increase by Rs.500. Yam-Hash fall under tax bracket of 40%, what is the terminal year cash flow?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Yam-Hash Corporation currently uses a water purification machine that was purchased 2 years ago. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is Rs.2,100, and it can be sold for Rs.2,500 at this time. If old machine is not replaced, then it can be sold for Rs.500 at the end of its useful life.
Yam-Hash is offered a replacement machine that has a cost of Rs.8,000, an estimated useful life of 6 years, and an estimated salvage value of Rs.800. This machine falls into the MACRS 5-year class, so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The replacement machine is expected to save Rs.300 per year. The new machine would require that inventories be increased by Rs.2,000, but accounts payable would simultaneously increase by Rs.500. Yam-Hash fall under tax bracket of 40%, what is the terminal year cash flow?
Step by step
Solved in 2 steps with 2 images
