Question

Required information [The following information applies to the questions displayed below. Manning Corporation is considering a new project requiring a $110,000 investment in test equipment with no salvage value. The project would produce $66,500 of pretax income before depreciation at the end of each of the next six years. The company's income tax rate is 38%. 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 MACRS Depreciation Depreciation* $ 22,000 35,200 21,120 12,672 12,672 6,336 $110,000 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Totals 11,000 22,000 22,000 22,000 22,000 11,000 $110,000 The modified accelerated cost recovery system (MACRS) for depreciation is discussed in Chapter 8 Required 1. Complete the following table assuming use of straight-line depreciation. Net cash flow equals the amount of income before depreciation minus the income taxes come ne me Taxes as Flows Depreciation Depreciation Income Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 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 MACRSTaxable Income Net Cash Depreciation Depreciation Income Taxes Flows Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 3. compute the net present value of the investment if straight-line depreciation is used. Use 12% as the discount rate. art Values are Based on: Year | Net Cash Inflow | x | PV Factor-I Present Value 4 Net present value 4. Compute the net present value of the investment if MACRS depreciation is used. Use 12% as the discount rate. Chart Values are Based on Year Net Cash Inflow x PV Factor Present Value Net present value

Answer 1

solution Part 1: Income Before Depreciation Straight-Line Depreciation Taxable Income Income Taxes Net Cash Flows d=c *38% e-c-d+b 11000 22,000 22,000 22,000 22,000 11,000 55500 44500 44500 44500 44500 55500 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 66500 66500 66500 66500 66500 66500 21090 16910 16910 16910 16910 21090 45410 49590 49590 49590 49590 45410 Part 2: Income Before DepreciationMACRS Depreciation Taxable Income Income Taxes Net Cash Flows c-a-b e=c-d-b d=c *3896 44500 31300 45380 53828 53828 60164 66500 66500 66500 66500 66500 66500 22000 35,200 21,120 12,672 12,672 6,336 16910 1 1894 17244 20455 20455 22862 49590 54606 49256 46045 46045 43638 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Part 3: Chart Values are Based on: 1290 Year Net Cash InflowxIPV Factor E Present Value 40,547 39,533 35,298 31,514 28,137 23,005 198034 110,000 88034 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 45,410 X 49,590x 49,590 x 49,590 x 49,590 X 45,410|x 2 3 4 6 Present value of cash inflows Present value of cash outtlows Net present value Part 4: Chart Values are Based on: 10% Year Net Cash InflowxIPV Factor E Present Value 44,279 43,532 35,060 29,262 26,126 22.107 200366 110,000 90366 49,590 x 54,606 x 49,256 X 46,045 x 46,045 X 43,638 X 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 2 3 4 6 Present value of cash inflows Present value of cash outtlows Net present value