Question

[The following information applies to the questions displayed below.] Manning Corporation is considering a new project requiring a $90,000 investment in test equipment with no salvage value. The project would produce $73,500 of pretax income before depreciation at the end of each of the next six years. The company's income tax rate is 32%. 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. (FV of $1. PV of $1. FVA of $1 and PVA of $1) (Use MACRS) (Use appropriate factor(s) from the tables provided.) Straight-Line MACRS epreciation Depreciation Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 $ 9,000 18,000 18,000 18,000 18,000 9,000 $ 18,000 28,800 17,280 10,368 10,368 5,184 Totals $90,000 $90,000

Answer 1

1)

	Income Before Depreciation	Straight Line Depreciation	Taxable Income	Income Taxes	Net Cash Flows
Year 1	$                                    73,500.00	9000	$          64,500.00	$          20,640.00	$         52,860.00
Year 2	$                                    73,500.00	18000	$          55,500.00	$          17,760.00	$         55,740.00
Year 3	$                                    73,500.00	18000	$          55,500.00	$          17,760.00	$         55,740.00
Year 4	$                                    73,500.00	18000	$          55,500.00	$          17,760.00	$         55,740.00
Year 5	$                                    73,500.00	18000	$          55,500.00	$          17,760.00	$         55,740.00
Year 6	$                                    73,500.00	9000	$          64,500.00	$          20,640.00	$         52,860.00

2)

	Income Before Depreciation	MACRS Depreciation	Taxable Income	Income Taxes	Net Cash Flows
Year 1	$                                    73,500.00	$                               18,000.00	$          55,500.00	$     17,760.00	$         55,740.00
Year 2	$                                    73,500.00	$                               28,800.00	$          44,700.00	$     14,304.00	$         59,196.00
Year 3	$                                    73,500.00	$                               17,280.00	$          56,220.00	$     17,990.40	$         55,509.60
Year 4	$                                    73,500.00	$                               10,368.00	$          63,132.00	$     20,202.24	$         53,297.76
Year 5	$                                    73,500.00	$                               10,368.00	$          63,132.00	$     20,202.24	$         53,297.76
Year 6	$                                    73,500.00	$                                  5,184.00	$          68,316.00	$     21,861.12	$         51,638.88

3)

i=10%
Year	Net Cash inflow	PV Factor	Present Value
1	$                                    52,860.00	0.9091	$          48,055.03
2	$                                    55,740.00	0.8264	$          46,063.54
3	$                                    55,740.00	0.7513	$          41,877.46
4	$                                    55,740.00	0.683	$          38,070.42
5	$                                    55,740.00	0.6209	$          34,608.97
6	$                                    52,860.00	0.5645	$          29,839.47
Present value of cash inflow			$       238,514.88
Present value of cash outflow			$       (90,000.00)
Net Present Value			$       148,514.88

4)

i=10%
Year	Net Cash inflow	PV Factor	Present Value
1	$                               55,740.00	0.9091	$     50,673.23
2	$                               59,196.00	0.8264	$     48,919.57
3	$                               55,509.60	0.7513	$     41,704.36
4	$                               53,297.76	0.683	$     36,402.37
5	$                               53,297.76	0.6209	$     33,092.58
6	$                               51,638.88	0.5645	$     29,150.15
Present value of cash inflow			$   239,942.27
Present value of cash outflow			$   (90,000.00)
Net Present Value			$   149,942.27