HomeworkLib
Question

A company, whose earnings put them in the 40% tax schedule, is considering purchasing a piece...

A company, whose earnings put them in the 40% tax schedule, is considering purchasing a piece of equipment for $69,500. The equipment is being depreciated under the MACRS/GDS depreciation method using a 8-yr depreciation period, a useful life of 5 years and a Salvage value of $15,000. It is estimated that the equipment will increase the company's earnings by $20,000 per year, however, the company has decided to get rid of this equipment in year 5 for $30,000. Determine if the equipment should be purchased using an MARR of 18%.

Show all work.

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Year-0 Year-1 $20,000$20,000$20,000 $20,000 $20,000 [Ref: Workings] $9,932-$17,02112,156$8,681 $6,206 [Ref: 7-year MACRS Table] $10,068$2,979$7,844 $11,319$13,794 4,027$1,192$3,138 $6,041$1,788$4,707 Year-2 Year-3 Year-4 Year-5 Increase in annual earnings Less: Depreciation Expenses Pretax net profit Less. Taxes @ 40% After-tax net profit Cost of new equipment After-tax sale value of equipment Add back Depreciation Expense Net Cash Flow Discount factor @ 18% (2) Present Value $4,528 $6,792 | -$5,517 $8,276 | [Before-tax net profit x 40%) $69,500 $24,202[Ref: Workings] $9,932 $17,021 $12,156$8,681$6,206 [Non-cash expense and so added backl $69,500 $15,973 $18,808 $16,862 $15,472$38,685 1.00000 $69,500 0.34746 $13,536.12 0.71818 | 0.60863 $13,507.77 $10,262.87 0.51579 $7,980.40 | 0.43711 |-1/(1+18%)0:1/(1+18%), .. and so on.. 1/(1+18%); (1+18%,- $16,909.45 1) x (2 Net Present Value (NP 7,303.40 [Sum of the present value from year-0 thru 5] As the NPV is negative, firm should reject the equipment (should not purchase)Workings: 7-year MACRS Table MACRS Depreciation for first 5 years: Year 7 years 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46% $69,500 Acquisition cost of the asset Less: Depreciation charged over first 5 years Book value of the machine at the end of year-5 Sale value of the asset at the end of year-5 Gain on sale of machine at the end of year-5 Dep. % 14.29% 24.49% 17.49% 12.49% 8.93% Year Cost Dep. Exp -$69,500-$9,932 -$69,500-$17,021 -$69,500-$12,156 -$69,500-$8,681 -$69,500-$6,206 $15,505 30,000 $14,495 [$69,500 x 14.29%) [$69,500 x 24.49%) [$69,500 x 17.49%) [$69,500 x 12.49%) ($69,500 x 8.93%) ($30,000-$15,505) 4 Tax at 40% on gain on sale of machine Aftertax salvage value of the asset $5,798 [$14,495 x 40%) $24,202 [S30,000 $5,798]

0 0
Add a comment
Know the answer?
Add Answer to:
A company, whose earnings put them in the 40% tax schedule, is considering purchasing a piece...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • Cardinal Bakery, whose current earnings put them in the thirty-five (35) percent marginal tax bracket, is...

    Cardinal Bakery, whose current earnings put them in the thirty-five (35) percent marginal tax bracket, is considering replacing another piece of equipment at a cost of $25,000. The equipment will be depreciated using the straight line method over the four (4) year useful life to a salvage value of $5,000. It is estimated that the equipment will increase Cardinal Bakery’s earnings by $8,000 for each of the four (4) years. Should the new equipment be purchased assuming Cardinal’s MARR of...

  • A company, whose earnings put it in the 35% marginal tax bracket, is considering the purchase...

    A company, whose earnings put it in the 35% marginal tax bracket, is considering the purchase of a new piece of equipment for $25,000. The equipment will be depreciated by the straight-line method over a 4-year depreciable life to a salvage value of $5000. It is estimated that the equipment will increase the company’s earnings before interest, tax, and depreciation by $8000 for each of the 4 years it is used. Should the equipment be purchased? Use a required rate...

  • PART III. Rimrock Construction Co. is purchasing a new piece of equipment for $34,000. The unit...

    PART III. Rimrock Construction Co. is purchasing a new piece of equipment for $34,000. The unit is expected to produce $21,000 for each of the next 4 years and will be sold at the end of that time for an expected salvage value of $4,000. Maintenance and expenses on the equipment are expected to be $2,000 for the fisrt year and to increase by $500 per year for each successive year of operation. Rimrock is purchasing the equipment by paying...

  • PART III. Rimrock Construction Co. is purchasing a new piece of equipment for $34,000. The unit...

    PART III. Rimrock Construction Co. is purchasing a new piece of equipment for $34,000. The unit is expected to produce $21,000 for each of the next 4 years and will be sold at the end of that time for an expected salvage value of $4,000. Maintenance and expenses on the equipment are expected to be $2,000 for the fisrt year and to increase by $500 per year for each successive year of operation Rimrock is purchasing the equipment by paying...

  • Please explain your answer! PART III Rimrock Construction Co. is purchasing a new piece of equipment for $34,000. The unit is expected to produce $21,000 for each of the next 4 years and will be sold...

    Please explain your answer! PART III Rimrock Construction Co. is purchasing a new piece of equipment for $34,000. The unit is expected to produce $21,000 for each of the next 4 years and will be sold at the end of that time for an expected salvage value of $4,000. Maintenance and expenses on the equipment are expected to be $2,000 for the fisrt year and to increase by $500 per year for each successive year of operation. Rimrock is purchasing...

  • 3. The first cost of a piece of equipment is $12,0oo, the useful life is estimated...

    3. The first cost of a piece of equipment is $12,0oo, the useful life is estimated to be 6 years, and the salvage value is 15% of the first cost. Using DDBM and the SLM depreciation methods, calculate (a) the book value after 3 years, and (b) the rate of depreciation and the depreciation rate amount in year 4 4. Claude is an engineering economist with Reynolds Company. A new $30,000 personal property asset is to be depreciated using MACRS...

  • The Tomas School of Falconry is considering replacing a piece of equipment used in making falconry...

    The Tomas School of Falconry is considering replacing a piece of equipment used in making falconry perches. The existing machine has 3 years useful life remaining. The machine had an original cost of $50,000, 3 years ago, and is projected to have a salvage value of $5,000 in 3 years time. The existing machine has a current market value of $30,000. The company has been depreciating the machine down to its salvage value using straight line depreciation. The new machine...

  • A company is considering buying a new piece of machinery that costs $30,000 and has a...

    A company is considering buying a new piece of machinery that costs $30,000 and has a salvage value of $8,000 at the end of its 5-year useful life. The machinery nets $5,000 per year in annual revenues. MARR = 8%. The internal rate of return (IRR) on this investment is between A. 2%-3%. B. 11%-12%. C. 6%-7%. D. 13%-14%. E. 4%-5%. Using the information in the previous question #5, if the company considering purchasing the machine uses a MARR of...

  • The UFRO Company is considering the replacement of an existing spectrometer with a new spectrometer; faster...

    The UFRO Company is considering the replacement of an existing spectrometer with a new spectrometer; faster and with expanded capacity. If the new spectrometer is purchased, the existing (old) computer will be sold for $30,000 immediately. The existing spectrometer was purchased four (4) years ago for $300,000. It is being depreciated under the 3-year MACRS schedule. The salvage value at the end of its seven-year life will be $30,000. The new spectrometer will be purchased for $500,000. If the new...

  • 1. Lynda Inc. purchased a piece of equipment for $15,000. Additional costs include transportation, $300; installation,...

    1. Lynda Inc. purchased a piece of equipment for $15,000. Additional costs include transportation, $300; installation, $700; test run, $1,000; and insurance from the date that the equipment begins productive output, $1,200. What is the capitalized amount of the equipment? a. $17,000 b. $18,200 c. $16,000 d. $15,000 2. Albany Inc. purchased land for S100,000. It paid $20,000 to raze an old building and it received $2,000 for salvage of materials. What is the cost of the land? a $100,000...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT