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About Finance Assignment: Finance assignment help tutors

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Sample of Finance Assignment Illustrations and Solutions:
Question 1: ABC and Co. is considering a proposal to replace one of its plants costing $
60,000 and having a written down value of $ 24,000. The remaining economic life of the
plant is 4 years after which it will have no salvage value. However, if sold today, it has a
salvage value of $ 20,000 The new machine costing $ 1,30,000 is also expected to have a
life of 4 years with a scrap value of $ 18,000 The new machine, due to its technological
superiority, is expected to contribute adated with decision given that the tax rate applicable
to the firm is 40%. (The capital gain or loss may be taken as not subject to tax.)
Solution:
1. Initial cash outflow
Cost of new machine
-Scrap value of old machine
$ 1,30,000
20,000
1,10,000
2. Subsequent cash inflows (annual)

Incremental benefit
-Incremental Depreciation
$ 28,000
Dep. on new machine
Dep. on old machine
Profit before tax
-Tax @ 40%
Profit after tax
Depreciation (added back)
Annual cash inflow
$ 60,000
22,000
15,200
22,800
22,000
44,800
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The amount of depreciation of $ 28,000 on the new machine is ascertained as follows ($

1,30,000 - $18,000)/4 = $ 28,000. It may be noted that in the given situation, the benefits
are given in the incremental from i.e., the additional benefits contributed by the proposal.
Therefore, only the incremental depreciation of $ 22,000 has been deducted to find out the
taxable profits. The same amount of depreciation has been added back to find out the
incremental annual cash inflows.
3. Terminal Cash inflow: There will be an additional cash inflow of $ 18,000 at the end of
4th year when the new machine will be scrapped away. Therefore, total inflow of the last
year would be $ 62,800 (i.e., $ 44,800 + $ 18,000)
Question 2:
XYZ is interested in assessing the cash flows associated with the
replacement of an old machine by a new machine. The old machine bought a few years ago
has a book value of $ 90,000 and it can be sold for $ 90,000. It has a remaining life of five
years after which is salvage value is expected to be nil. It is being depreciated annually at
the rate of 20 percent (written down value method.)
The machine costs $ 4,00,000 it is expected to fetch $ 2,50,000 after five years when it will
no longer be required. It will be depreciated annually at the rate of 33 1/3 percent (written
down value method). The new machine is expected to bring a saving of $ 1,00,000 in
manufacturing costs. Investment in working capital would remain unaffected. The tax rate
applicable to the firms is 50 percent.
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Find out the relevant cash flows for this replacement decision.
Solution:
Initial cash flow:
Cost of new machine
$ 4,00,000
-Salvage value of old machine
90,000
3,10,000
Subsequent annual cash flows:

(Amount $ 000)
Yr.1
Yr.2
Yr.3
Yr.4
Yr.5
Savings in costs (A)
100
100
100
100
100
Depreciation on new machine
133.3 88.9
59.3
39.5
263
-Depreciation on old machine
18.0
14.4
11.5
9.2
7.4
Therefore, incremental depreciation (B)
115.3 74.5
47.8
30.3
18.9
Net incremental savings (A- B)
-15.3 25.5
52.2
69.7
81.1
Less: Incremental Tax @ 50%
-7.6
12.8
26.1
34.8
40.6
Incremental Profit
-7.7
12.7
26.1
34.9
40.5
115.3 74.5
47.8
30.3
18.9.
Net cash flow
107.6 87.2
73.9
65.2
59.4
Terminal cash flow: There will be a cash inflow of $ 2,50,000 at the end of 5th year when
the new machine will be scrapped away. So, in the last year the total cash inflow will be $
3,09,400 (i.e., $ 2,50,000 + $ 59,400)
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Question 3:
XYZ Ltd. Is trying to decide whether it should replace a manually
operated machine with a fully automatic version of the same machine. The existing
machine, purchased ten years ago, has a book value of $ 40,000 and remaining life of 10
years. Salvage value was $ 40,000. The machine has recently begun causing problems with
breakdowns and is costing the company $ 20,000 per year in maintenance expenses. The
company has been offered $ 1,00,000 for the old machine as a trade-in on the automatic
model which has been offered $ 1,00,000 for the old machine as a trade-in on the
automatic model which has a deliver price (before allowance for trade-in) of $ 2.20,000. It
is expected to have a ten-year life and a salvage value of $ 20,000. The new machine will
require installation modifications costing $ 40,000 to the existing facilities, but it is
estimated to have a cost savings in materials of $ 80,000 per year. Maintenance costs are
included in the purchase contract and are borne by the manufacturer. The tax rate is 40%
(applicable to both revenue income as well as capital gains/losses). Straight line
depreciation over ten years will be used. Find out the relevant cash flows.
Solution:
Initial cash outflow:
Cost of new machine
$ 2,20,000
+ Initial expenses
40,000
2,60,000
Trade-in
1,00,000
1,60,000
-Tax savings (40% of $ 2,40,000 1,00,000)
56,000
$ 1,04,000
Subsequent cash flows :

Cost reduction (savings)
80,000
+Repairs (not required)
20,000
1,00,000
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Depreciation on new machine
24,000
(2,20,000 + 40,000 20,000)/10

Depreciation on old machine
10,000
(2,40,000 40,000)/10
Therefore, incremental dep.
4,000
Net savings
96,000
Tax@40%
34,000
Savings after tax
51,600
14,000
Annual cash inflow
65,600
Terminal cash flow: There will be a cash inflow of $ 20,000 at the end of 10th year when
the new machine will be scrapped away. So, in the last year the total cash inflow will be $
85,600 (i.e., $ 20,000 + $ 65,600)
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Question 4:
Chandra Ltd. purchased a special machine one year ago at a cost of $
12,000. At that time the machine was estimated to have a useful of 6 years and no salvage
value. The annual cash operating cost is approximately $ 20,000. A new machine has just
come on the market which will do the same job but with an annual cash operating cost of
only $ 17,000. The new machine costs 21,000 and has an estimated life of 5 years with zero
salvage value. The old machine can be sold for $ 10,000 to a scrap dealer. Straight line
depreciation is used, and the companys income tax rate is 40 percent. Assuming a cost of
capital of 8% you are required to compute the incremental cash flows after taxes.
Solution:
Calculation of Incremental Cash flows:
Initial Outflow:
Cost of New machine
$ 21,000
-Sale Value of Old machine
$ 10,000
$ 11,000
Subsequent Annual Inflows:

Cash Operating Cost of Old machine
$ 20,000
-Cash Operating Cost of New machine
$ 17,000
Savings in Cash Operating Cost
$ 3,000
Depreciation of old machine (1200 6)
$ 2,000
Depreciation on New machine (21,000
5)
$ 3,000
4,200
Increase in Depreciation
$ 2,200
Net increase in Profit before Tax

Tax @40%
800
Incremental Cash flow :
320
Savings in Cash Operating Cost
$ 3,000
-Increase in Tax Liability
320
Net Cash Inflow
2680
Terminal Inflow
Nil

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