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 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 | |||||
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