Question

net present worth of this investment. Contributedby value, and Assume unit 444 CHAPTER 12: INCOME TAXES FOR CORPORATIONS Mukasa Ssemakula, Wayne State University (b) Explain why the rate of return obtained in part (a) is different from the rate of return obtained in Problem 12-20. 12-25 A firm has invested $400.000 in car- ment. They will depreciate the r-washing equip equipment by 6% (a) Comput (b) Comput MACRS G MACRS, assuming a $50,000 salvage value at the have a before-tax cash flow, after meeting l expenses of operation (except depreciation), d $165,000 per year. The firm's combined corpore bonus depreciation with the balance using 5-yeta end of the 5-year useful life. The firm is expected 12-22 A firm may invest in equipment that will be depreci- A ated by double declining balance depreciation with conversion to straight-line depreciation in year 5 For depreciation purposes a $700,000 salvage value at the end of 6 years is assumed. But the actual value is thought to be $1,000,000, and it is this sum that is shown in the before-tax cash flow. сoгрога chased $30,000 income to 12-29 (a) The BV tax rate is 28%. (a) If the projected income is correct, and the cquin ment can be sold for $100,000 at the end of 5 what after-tax rate of return would pany ha $9500 sold th Before-Tax Cash Flow (in $1000) eral anc Compu truck. Year years, corporation receive from this venture? (b) Summarize the environmental impact of com mercial car washing. Include how wash wate drainage is directed, how discharge sources are treated (or not), the impacts of sediment, detes gents, waxes, and heavy metals, and local/state policies/practices. 0 -$12,000 1,727 (b) Hybrid truck p the Howey 2 2,414 3 2,872 4 3,177 5 3,358 ative key en emissia 12-26 A mining corporation purchased $120,000 of production machinery and depreciated it using 40% bonus depreciation with the balance using 5-year MACRS depreciation, a 5-year depreciable life, and zero salvage value. The corporation is a profitable one that has a 22% combined incremental tax rate At the end of 5 years the mining company of operation and sold the 6 1,997 1,000 Salvage value source hydrid life-cy If the firm wants a 9% after-tax rate of return and its combined incremental income tax rate is 24%, determine by annual cash flow analysis whether the investment is desirable. 12-30 A chemica $550,000; MACRS the chemie company f also provi- vessel at th of the 6 ye changed its production machinery for $40,000. During the 5 machinery was used. it reduced mine $32,000 a vear. before taxes. If Bonus Depreciation years the operating costs the by Assume all bonus depreciation occurs in Year 1 unless otherwise stated. company MARR is 12% after taxes the 12-23 A firm has invested $60,000 in machinerry with a 5-year useful life. The machinery will have no salvage value, as the cost to remove it will equal. its scrap value. The uniform annual benefits from the machinery are $15,000. For a combined 45% income tax rate, and 100 % bonus depreciation, investment in the machinery a satisfactory one? ,a large, profitable corporation, is consideing adding some automatic equipment to its produca facilities. An investment of $120,000 will produce an annual benefit of $40,000. If the firm uses 60% 12-27 Zeon, and bough a 24% cor after-tax r 12-31 Xon, a sr bonus depreciation with the balance using 7-year $12,000 salvage value, will it obtain the desired a new pe will depre drilling ri Xon $750 drilling ri combined compute the after-tax rate of return. 12-24 A farmer bought a new harvester for $120,000. The and depreciation, an 8-year useful MACRS life harvester's operating expenses averaged $10,000 per year but the harvester saved $40,000 per year in labor costs. It was depreciated over a life of 5 years using the 100 % bonus depreciation method, assuming a salvage value of $30,000. The farmer sold the harvester for only $10,000 at the end of the fifth year. Given an income tax rate of 30 % and a MARR rate of 5% per year, determine the after-tax 12% after-tax rate of return? Assume that the equipment can be sold for its $12.000 salvage vale at the end of the 8 years. Also assume a 28% income tax rate for state and federal taxes combined. MARR (a) Does t MACRS Depreciation 12-28 A special power tool for plastic products costs $400,000 and has a 4-year useful life, no salvage A

please help with question #12.24 without using excel.

Answer 1

Initial cost = $120000

For 1st year,

Revenue (cost saving) = $40000

Less: Operating expenses =$10000

Less: Depreciation = $90000

Profit before tax = - $60000

Less Tax @30% = - $18000

Profit after tax = -$42000

Cash flow = $48000 (after adding depreciation)

For years 2-4

Revenue (cost saving) = $40000

Less: Operating expenses =$10000

Less: Depreciation = 0

Profit before tax = $30000

Less Tax @30% = -$9000

Profit after tax = $21000

Cash flow = $21000

For years 5

Revenue (cost saving) = $40000

Less: Operating expenses =$10000

Less: Depreciation = 0

Profit before tax = $30000

Less Tax @30% = -$9000

Profit after tax = $21000

Add: Salvage value = $10000

Add Tax benefit due to = ($20000 * 30%)

selling at below book price = $6000

Cash flow = $37000

So NPV = -120000 + 48000/1.05 +21000/1.05² + ... +  21000/1.05⁴ + 37000/1.05⁵

= -120000 + 45714.29 + 19047.62 +....+17276.75 +28990.47

= $ 9,169.714

which is the after tax NPV