Question

Manning Corporation is considering a new project requiring a $100,000 investment in test equipment with no salvage value. The project would produce $74,500 of pretax income before depreciation at the end of each of the next six years. The company’s income tax rate is 36%. In compiling its tax return and computing its income tax payments, the company can choose between the two alternative depreciation schedules shown in the table. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use MACRS) (Use appropriate factor(s) from the tables provided.)

	Straight-Line Depreciation					MACRS Depreciation
Year 1		$	10,000				$	20,000
Year 2			20,000					32,000
Year 3			20,000					19,200
Year 4			20,000					11,520
Year 5			20,000					11,520
Year 6			10,000					5,760
Totals		$	100,000				$	100,000

Problem 25-3A Part 2

2. Complete the following table assuming use of MACRS depreciation. Net cash flow equals the income amount before depreciation minus the income taxes.

Income Before Taxable Depreciation Depreciation Income MACRS Income Net Cash Taxes Flows Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Answer 1

		Income before Depreciation	SLM Depreciation	Taxable Income	Tax	Net cashflows
	Year 1	74500	10000	64500	23220	41280
	Year 2	74500	20000	54500	19620	34880
	Year 3	74500	20000	54500	19620	34880
	Year 4	74500	20000	54500	19620	34880
	Year 5	74500	20000	54500	19620	34880
	Year 6	74500	10000	64500	23220	41280
		Income before Depreciation	MACRS Depreciation	Taxable Income	Tax	Net cashflows
	Year 1	74500	20000	54500	19620	34880
	Year 2	74500	32000	42500	15300	27200
	Year 3	74500	19200	55300	19908	35392
	Year 4	74500	11520	62980	22673	40307
	Year 5	74500	11520	62980	22673	40307
	Year 6	74500	5760	68740	24746	43994
	Chart values based on:
	"I"   =	10%
	Year	Net Cashflow x	PV Factor        =	Present value
	1	41280	0.90909	37527
	2	34880	0.82645	28826
	3	34880	0.75131	26206
	4	34880	0.68301	23824
	5	34880	0.62092	21658
	6	41280	0.56447	23301
	Total Present Value			161342
	Less: Initial Investment			100000
	Net Present value			61342
	Chart values based on:
	"I"   =	10%
	Year	Net Cashflow x	PV Factor        =	Present value
	1	34880	0.90909	31709
	2	27200	0.82645	22479
	3	35392	0.75131	26591
	4	40307	0.68301	27530
	5	40307	0.62092	25028
	6	43994	0.56447	24833
	Total Present Value			158170
	Less: Initial Investment			100000
	Net Present value			58170