Answer
In an equipment-replacement decision for a taxpaying company, the cash flows can be categorized as follows:
1. Initial Cash Flows:
a. Initial machine investment
b. Initial working-capital investment
c. After-tax cash flow from the current disposal of the old machine
2. Annual Operating Cash Flows:
a. Annual after-tax cash flow from operations (excluding the depreciation effect)
b. Income tax cash savings from annual depreciation deductions
3. Terminal Cash Flows:
a. After-tax cash flow from the terminal disposal of machines
b. After-tax cash flow from the terminal recovery of working-capital investment
Work Step by Step
These categories encompass the various cash flows that should be considered when evaluating the replacement of equipment in a taxpaying company, providing a comprehensive financial perspective for the decision-making process.
