المحاسب الإداري المعتمد الجزء 2 E. Investment Decisions

Northwake: Retiring a Compressor System Early

Northwake Cold Storage

Question of 7 Northwake: Retiring a Compressor System Early

Northwake: Retiring a Compressor System Early Case-based question

الحالة

Northwake Cold Storage operates six refrigerated warehouses that hold frozen and chilled food for grocery distributors. Two years ago Northwake installed a refrigeration compressor system at its Harbor Road warehouse for $345,000. Last month Harbor Road paid a non-refundable $15,000 fee for an energy audit, which found that a variable-speed compressor system would use far less electricity. Imani Osei, who manages operations at Harbor Road, is preparing a request to replace the existing system now instead of running it for the rest of its life.

Item	Existing compressor system	Replacement system
Cost	$345,000, paid two years ago	$396,000 purchase price plus $24,000 installation, both payable now
Tax depreciation	Straight-line over a 5-year recovery period to zero; the deductions for the first two years (including the year just ended) have been claimed	Straight-line over 5 years to zero; first deduction in Year 1
Cash from selling it today	$118,000 (firm offer from an equipment dealer)	Not applicable
Remaining service life	5 years	5 years
Proceeds at the end of Year 5	$0	$0

Compared with keeping the existing system, the replacement would cut Harbor Road's electricity costs by $71,000 a year and its maintenance costs by $27,000 a year for each of the next five years. Northwake's controller has pointed out that selling the existing system at the dealer's price would be recorded as a loss on disposal.

الافتراضات

The comparison covers five years: keep the existing system for Years 1-5, or replace it at Year 0 and run the replacement for Years 1-5. Either system is scrapped at the end of Year 5 for zero proceeds and zero removal cost, and no other replacement occurs within the five years.
The existing system can keep operating for all five years, but its tax deductions end after Year 3 because its five-year recovery period started two years ago.
Book depreciation equals tax depreciation. Straight-line deductions are taken for full years; there is no bonus or other accelerated depreciation.
The income tax rate is 25% in every year. The loss on selling the existing system is fully deductible against Northwake's other taxable income, and the resulting tax saving is realized at Year 0 (immediate use). Northwake has enough taxable income every year to use each deduction in the year it arises.
The purchase, installation and sale occur at Year 0. Operating savings and their tax effects occur at the end of each year.
Northwake's cost of capital for this decision is 9%. For present values, use these 9% ordinary-annuity factors exactly as printed (they are also shown in Resource r1): 1 year 0.917; 2 years 1.759; 3 years 2.531; 4 years 3.240; 5 years 3.890. Round only the final answer.
The decision does not change working capital or the head-office costs allocated to Harbor Road.

مواد مرجعية

Present value of an ordinary annuity of $1 at 9%

Periods (years)	Factor at 9%
1	0.917
2	1.759
3	2.531
4	3.240
5	3.890

Payments at the end of each period. Factors are rounded to three decimal places; the answer keys in this case use these printed values.

Osei's draft analysis lists the $345,000 Northwake paid for the existing compressor system two years ago. How should that $345,000 be treated in the NPV of replacing the system now?

الإجابة Include it as the existing system's opportunity cost, since $345,000 is what Northwake gave up to own the system. Spread it evenly over Years 1-5 as an annual cost of replacing, since the existing system has five years of service left. Exclude it as a sunk cost; it enters the analysis only through the remaining tax basis, which is not itself a cash flow. Exclude the $345,000, but charge the book loss on disposal as a Year 0 cost, since that loss arises only if Northwake replaces.

If Northwake sells the existing system today for $118,000, which statement correctly gives the system's tax basis at the date of sale and the tax consequence of the sale?

الإجابة Tax basis $276,000; the $158,000 loss saves $39,500 of tax at Year 0, so the sale brings in $157,500 after tax. Tax basis $207,000; the $89,000 loss is a bookkeeping entry with no tax effect, so the sale brings in $118,000 after tax. Tax basis $138,000; the $20,000 loss saves $5,000 of tax at Year 0, so the sale brings in $123,000 after tax. Tax basis $207,000; the $89,000 loss saves $22,250 of tax at Year 0, so the sale brings in $140,250 after tax.

Select the THREE statements that correctly give the amount and timing of an after-tax cash flow that results from replacing the system.

اختيار 3 إجابات. المحدد 0 / 3

الإجابة The full $98,000 of annual cost savings in each of Years 1–5, because cutting costs is not the same as earning revenue and so is not taxed. After-tax cost savings of $98,000 × (1 − 25%) = $73,500 in each of Years 1–5. A single $51,750 reduction in cash flow at Year 0 for the tax savings on the existing system's three remaining deductions (3 × $69,000 × 25%), which Northwake gives up by selling it. Tax savings of ($420,000 ÷ 5) × 25% = $21,000 in each of Years 1–5 from depreciating the replacement system, whose depreciable cost includes installation. An $84,000 cash outflow in each of Years 1–5 for depreciation of the replacement system. A $17,250 reduction in cash flow in each of Years 1–3 for the tax savings on the existing system's remaining deductions ($69,000 × 25%), which Northwake gives up by selling it.

What is Harbor Road's net cash flow at Year 0 if the compressor system is replaced? Include every cash flow that occurs at the decision date because of the replacement. Enter whole US dollars, entering a net outflow with a minus sign (for example, -50000). No rounding is needed.

الإجابة USD

رقم صحيح. يمكن كتابة المبلغ السالب بإشارة ناقص أو بين قوسين.

What is the NPV of replacing the compressor system now rather than keeping it for five more years? Use the 9% ordinary-annuity factors printed in Resource r1 exactly as shown (1 year 0.917; 2 years 1.759; 3 years 2.531; 4 years 3.240; 5 years 3.890), keep all other amounts unrounded, and round only the final answer to the nearest whole dollar. Enter whole US dollars; enter a negative NPV with a minus sign.

الإجابة USD

رقم صحيح. يمكن كتابة المبلغ السالب بإشارة ناقص أو بين قوسين.

Complete the controller's note, which compares replacing with keeping the system by looking at depreciation alone (ignore the operating savings and the Year 0 sale). In Year 1, replacing means an $84,000 deduction on the new system instead of the $69,000 deduction the existing system would have given if kept. As a result of this change in depreciation, Harbor Road's Year 1 pre-tax operating cash flow Effect on Year 1 pre-tax operating cash flow , and the income tax Northwake pays for Year 1 Effect on Year 1 income tax paid . Making the same comparison for Year 4, the income tax Northwake pays Effect on Year 4 income tax paid .

Northwake's capital-request template begins by defining which cash flows are relevant. From the third step on, each step uses a figure produced by the step immediately before it. Put Osei's five steps in the template's order, first to last.

إعادة الترتيب بالسحب أو بأزرار الأسهم.

Measure the tax effect of selling the existing system, giving the after-tax disposal proceeds.
Discount the later after-tax flows and add the Year 0 cash flow to obtain the NPV.
List the cash flows that differ between replacing and keeping the system, and set aside those that do not.
Combine the after-tax disposal proceeds with the other Year 0 flows to obtain the Year 0 cash flow.
Work out the existing system's tax basis from its cost and the deductions already claimed.

جارٍ الحفظ…

تظهر الدرجات والإجابات الصحيحة والشروح فور تسليم الإجابات. ولا يحصل السؤال غير المُجاب على أي درجة.

جارٍ الفحص…

حالات تدريبية أصلية من إعداد صرح. ليست أسئلة من امتحانات IMA، ويخضع تصحيحها لسياسة صرح الخاصة، وهي تختلف عن سياسة الامتحان الرسمي.