Question

please do #2 and #6 Te=15%

Use this scenario for problems 2-6 Oxford Manufacturing company needs to invest in a new air compressor. They have narrowed the choice to two alternatives, A and B. the following financial data has been collected: Model A Model B Investment Cost $25,000 $35.000 Annual Incremental Revenues $18,700 $16,500 Annual O&M Costs $5,600 $3.500 Salvage Value $4,000 Service Life 10 years 10 years Depreciation S-vear 5-year Method MACRS MACRS Assume the After Tax is MARR-10% (2) What is the annual depreciation for the equipment for Model A? Complete the table below and show the book value for each year. Depreciation Amount L E OY Book Value Year 0 WNO (3) What is the annual depreciation for the equipment for Model B? Complete the table below and show the book value for each year. Year Depreciation Amount T E OY Book Value 0 WN

Answer 1

EOY Book Value Annual Depreciation for the Equipment for Model A Depreciation Depreciation Year Rate (MARCS Calculation Amount Table) 0.00% 20.00% =25000*20% 5,000 32.00% =25000*32% 8,000 19.20% =25000*19.2% 4,800 11.52% =25000*11.52% 2,880 11.52% =25000*11.52% 2,880 5.76% =25000*5.76% 1,440 25,000 20,000 12,000 7,200 4,320 1,440 3 EOY Book Value Annual Depreciation for the Equipment for Model B Depreciation Depreciation Year Rate (MARCS Calculation Amount Table) OL 0.00% 20.00% =35000*20% 7,000 32.00% =35000*32% 11,200 19.20% =35000*19.2% 6,720 11.52% =35000*11.52% 4,032 11.52% -35000*11.52% 4,032 5.76% =35000*5.76% 2,016 35,000 28,000 16,800 10,080 6,048 2,016 Model A Year Depreciation Taxable income Tax DR @ 10% Before Tax Cash Flow 13,100 13,100 13,100 13,100 13,100 13,100 13,100 13,100 13,100 13,100 Present Worth 6,259 3,583 5,301 5,933 5,000 8,000 4,800 2,880 2,880 1,440 8,100 5,100 8,300 10,220 10,220 11,660 13,100 13,100 13,100 13,100 Total 1,215 765 1,245 1,533 1,533 1,749 1,965 1,965 1,965 1,965 After Tax Cash Flows 6,885 4,335 7,055 8,687 8,687 9,911 11,135 11,135 11,135 11,135 0.90909 0.82645 0.75131 0.68301 0.62092 0.56447 0.51316 0.46651 0.42410 0.38554 5,394 5,595 5,714 5,195 4,722 4,293 51,988 25,000 26,988 Less. Investment Net Present Value Model B Year Depreciation Before Tax Cash Flow 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 7,000 11,200 6,720 4,032 4,032 2,016 Taxable Income 6,000 1,800 6,280 8,968 8,968 10,984 13,000 13,000 13,000 13,000 Total Tax 900 270 942 1,345 1,345 1,648 1,950 1,950 1,950 1,950 After Tax Cash Flows 5,100 1,530 5,338 7,623 7,623 9,336 11,050 11,050 11,050 11,050 DR @10% 0.90909 0.82645 0.75131 0.68301 0.62092 0.56447 0.51316 0.46651 0.42410 0.38554 Present Worth 4,636 1,264 4,011 5,207 4,733 5,270 5,670 5,155 4,686 4,260 44,893 35,000 9,893 Less. Investment Net Present Value We prefer to Invest in Model A as it is giving more benefit Assumptions: 1) Salvage Value is ignored in Present Worth Calculation as there is no clear cut information about it 2) Tax Rate considered 15% as you mentioned on top of the image, In Ques, There is no tax rate mentioned. 3) Normally, In capital budgeting question we calculate Cash Flows after adding non cash expense i.e. Depreciation in After Tax Cash Flows, as there was a specific format given in question, we followed that. Even if we consider, the final decision will not change