This answer results from including the loss on the sale of the old equipment as a Year 0 cash inflow. Gains and losses on disposals of equipment do not affect cash and thus are not cash items. Only the cash received for the sale of the equipment affects cash. That does not mean it is incorrect to add a loss to or subtract a gain from net income when calculating net cash flow from operations using the indirect method for the Statement of Cash Flows. In that case, it is correct to do that, because net income has been affected by the gain or loss, which is a non-cash transaction. Therefore, it is necessary to "back out" the effect of the gain or loss. But we are not developing a Statement of Cash Flows here, and we don't have a net income figure to adjust. We are doing capital budgeting, and in capital budgeting, we are not working with net income or cash flows from operations using the indirect method. We are working only with cash transactions; and a loss or a gain is not a cash transaction.
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This answer fails to include the $25,000 installation and transportation costs as a Year 0 outflow.
Note: This question asks for "total after-tax cash outflows" in Year 0, but what it really wants is “net after-tax cash outflows” in Year 0. The net after-tax cash outflows in Year 0 are: New equipment cost $(250,000) Installation and transportation ( 25,000) Cash received from sale of old equipment 80,000 Tax benefit of loss on old equipment: ($80,000 ? $100,000) × .40 8,000 Working capital increase: $(30,000) incr in current assets + $15,000 incr in current liabilities ( 15,000 ) Net after-tax cash outflow $(202,000)
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