Question

MACRS Depreciation Allowances Property Class 3-Year 5-Year 33.33% 20.00% 44.45 32.00 14.81 19.20 7.41 11.52 7-Year 14.29% 24.49 17.49 12.49 8.93 8.92 8.93 4.46 11.52 5.76 Use the following information to answer the next three questions: Some new equipment under consideration will cost $1,600,000 and will be used for 7 years. Net working capital will experience a one time increase of $778,000 if the equipment is purchased. The equipment is expected to generate annual revenues of $2,300,000 and annual costs of $736,000. The project falls under the seven-year MACRs class for tax purposes, the tax rate is 32 percent, and the cost of capital is 10 percent. The project's fixed assets can be sold for $384,000 at the end of the project's life. Question 26 2 pts What is the book value of the equipment at the end of the project's life? Round your answer to the nearest whole dollar.

Answer 1

Tax rate		32%
Calculation of annual depreciation
Depreciation		Year-1	Year-2	Year-3	Year-4	Year-5	Year-6	Year-7	Total
Cost		$    1,600,000	$   1,600,000	$    1,600,000	$    1,600,000	$   1,600,000	$    1,600,000	$1,600,000
Dep Rate		14.29%	24.49%	17.49%	12.49%	8.93%	8.92%	8.93%
Depreciation		$       228,640	$      391,840	$       279,840	$       199,840	$      142,880	$       142,720	$   142,880	$1,528,640
Calculation of after-tax salvage value
Cost of machine			$   1,600,000
Depreciation			$   1,528,640
Book value at the end of project life			$        71,360
Sale price			$      384,000
Profit/(Loss)			$      312,640
Tax payable			$      100,045
Sale price after-tax			$      283,955
Calculation of annual operating cash flow
		Year-1	Year-2	Year-3	Year-4	Year-5	Year-6	Year-7
Sale		$    2,300,000	$   2,300,000	$    2,300,000	$    2,300,000	$   2,300,000	$    2,300,000	$2,300,000
Less: Operating Cost		$       736,000	$      736,000	$       736,000	$       736,000	$      736,000	$       736,000	$   736,000
Contribution		$    1,564,000	$   1,564,000	$    1,564,000	$    1,564,000	$   1,564,000	$    1,564,000	$1,564,000
Less: Depreciation		$       228,640	$      391,840	$       279,840	$       199,840	$      142,880	$       142,720	$   142,880
Profit before tax		$    1,335,360	$   1,172,160	$    1,284,160	$    1,364,160	$   1,421,120	$    1,421,280	$1,421,120
Tax@32%		$       427,315	$      375,091	$       410,931	$       436,531	$      454,758	$       454,810	$   454,758
Profit After Tax		$       908,045	$      797,069	$       873,229	$       927,629	$      966,362	$       966,470	$   966,362
Add Depreciation		$       228,640	$      391,840	$       279,840	$       199,840	$      142,880	$       142,720	$   142,880
Cash Profit after-tax		$    1,136,685	$   1,188,909	$    1,153,069	$    1,127,469	$   1,109,242	$    1,109,190	$1,109,242
Calculation of NPV
						10.00%
Year		Capital	Working capital	Operating cash	Annual Cash flow	PV factor	Present values
0		$ (1,600,000)	$     (778,000)		$ (2,378,000)	1.0000	$ (2,378,000)
1				$    1,136,685	$    1,136,685	0.9091	$    1,033,350
2				$    1,188,909	$    1,188,909	0.8264	$       982,569
3				$    1,153,069	$    1,153,069	0.7513	$       866,318
4				$    1,127,469	$    1,127,469	0.6830	$       770,076
5				$    1,109,242	$    1,109,242	0.6209	$       688,752
6				$    1,109,190	$    1,109,190	0.5645	$       626,109
7		$       283,955	$      778,000	$    1,109,242	$    2,171,197	0.5132	$    1,114,167
					Net Present Value		$    3,703,341