Question

2. A small back-hoe is purchased for $12,000 and has an estimated salvage value of $2,000 at the end of 5 years. Annual revenues and annual operating costs, excluding depreciation, are $5,000 and $1,000 respectively. If i = 10% and the firm's tax rate is considered to be 50%, a) Determine the annual equivalent of "taxes paid" for the 5-year analysis period if straight line depreciation is used. b) Determine the annual equivalent of the "taxes paid" if the MACRS method is used. The backhoe is considered to be a 5-year class asset. Assume that incomes and costs will continue to be the same after the 5-year analysis period. c) Based on your answers in (a) and (b), which depreciation method would you recommend? Why?

Answer 1

04r Hry qu 000 Revenue 5000 500D 5000 Cest 1000 (oo0 EBIDT 4000 4000 40 000 4000 4000 Depreciak on 2000 2000 200 0 200 6 2DOO EBIT 2000 2000 2000 2 0 6 Inteust 10%% (000 1200 1200 200 gooo PBT 800 800 80 0 400 400 400 Tan so 400 400 400 400 400 Net Income 400 calculated en straigh ine 1's Here depreciah'om method Purchare brice OFesuibneut have We Selae Valuis vear of usay /2,000-200 0 2000 55 2000 400 xS 7o tal tar Paid

০০০৭ oos 005 1382 Equipuut 000 - y ho 0 00S Q001 4000 d197 1382 pooh 3 197 oooh 61 h (a1 (a O0ht 9/ Cost 709 ৪। h। O 09/ 709 Depreciahen Ooh Tax PBT MACRS depre cahon me hod Caleulah m 2000x 2D/ 2U0 o ahiE=7E Oo 78 A75 11 xa00t Hee we have 12000 X19-2%2304 3781 $ To tol tax paid by MACRS meth is Straiyht ine mathod s $aTD So MACRS wethal is be-tee