Question

show all work and draw a cash for diagram

DEPRECIATION AND INCOME TAXES la) A machine is purchased for $20,000 and has an expected life of 5 years. The salvage value at the end of 5 years is $2,000. According to: 1) The Straight Line Depreciation 2) The Sum of the Yea's Digit (SOYD) depreciation, what is the book value of the machine at the end of four years? 1b) A project provides a revenue of $20,000 increasing at $5,000 per year during a five-year investment period. The machine to be used on the project is purchased for $20,000 and has an expected life of 5 years. The salvage value at the end of 5 years is $2,000. Out-of-pocket expenses are $4000 and increases arithmetically at $1,000/yr thereafter, and depreciation deduction for income tax purposes are taken using a Sum of the Years Digit Depreciation method. What is the before tax and after tax cash flow Rate of Return if the tax rate is 40% ? If the minimum attractive rate of return is 10% will you recommend the project on an after tax cash flow basis ?

Answer 1

DEPRECIATION AND INCOME TAXES (a) PURCHASE PRICE OF MACHINE = $20,000. SALVAGE VALUE = $2,000 EXPECTED LIFE = 5 years. STRAIGHT CINE DEPRECIATION PURCHASE SALVAGE PRICE - VALUE : ESTIMATED USEFUL LIFE = (20,000 - 2000) : 5 18,000 -5$ 3,600 STRAIGHT LINE DEPRECIATION OVER 5 YEARS PERCENTAGE VALUE AFTER DEPREUATION 3 4 5 * 2 YEARS

SUM OF THE YEARS DEPRECIATION : This method of depreciation calculation is based on the assumption that assets are more productive when they are them and hence depreciate at a higher rate in the early years. DEPRECIATI REMAINING LIFE DEPRECIATING ENENSE 11+2+3+4+5-15 FORMUL A=Depreciable lase & Remaining Life SYD SYD= Su 3....n) jn- useful life of asset in years. Depreciable base = Cost value - Salvage value YEAR FRACTION BASE 20000 - 2000= 18,000 = 5/15 6000 18000 4/15 4800 18 ooo 3/15 3600 4 18000 9 18 000 V15 [1200 AT THE END OF 4 years the value of the machine is $12.00 ای بر w o Rl15