1) What is after-tax PW of alternative 1?2) What is after-tax PW of alternative 2?3) Which project should be selected? A company with an effective income tax rate and a capital gains tax of 25%and a MARR of 12% must choose between two mutually exclusive projects.Project 1Project 2Initial Cost11,00033,000Uniform annual benefit3,0009,000StraightDepreciation methodМACRSLineDepreciable lifeЗ yearsЗ уearsIRS approved salvage value for depreciation2,000purposesUseful life5 years5 yearsActual market value at end of useful life2,0002,000

Calculating a present worth (PW) of any project is a capital budgeting technique that ensures that the investment in any project or anywhere should be done only if it is profitable and shows positive value using the time value of money concept.1). First, calculate the Depreciation amount using the straight-line method: Depreciation using straight-line method=Initial cost-Salvage valueDepreciable life=11,000-2,0003=9,0003=3,000 Alternative 1 (Project 1) After tax PW: Calculation table showing the formulas used: Result: Therefore, the PW of Project 1 is -236.74.2) First calculate depreciation using MACRS method. The MACRS depreciation rates are taken from MACRS- 3 year depreciation table. Formula used: Result:Alternative 2 (Project 2) After tax PW: Calculation table showing the formulas used: Result: Therefore, the PW of Project 2 is 223.16.3) As per, the concept of NPV, the project having positive and higher NPV should be selected /opted. Project 2 should be selected as it results in a positive present worth of 223.16. Summary: 1) PW of Alternative 1=-236.74 2) PW of Alternative 2=223.16 3) Select Project 2 Calculating a present worth (PW) of any project is a capital budgeting technique that ensures that the investment in any project or anywhere should be done only if it is profitable and shows positive value using the time value of money concept. Summary: 1) PW of Alternative 1=-236.74 2) PW of Alternative 2=223.16 3) Select Project 2

Answered: 1) What is after-tax PW of alternative…

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1) What is after-tax PW of alternative 1? 2) What is after-tax PW of alternative 2? 3) Which project should be selected?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

1) What is after-tax PW of alternative 1?

2) What is after-tax PW of alternative 2?

3) Which project should be selected?

A company with an effective income tax rate and a capital gains tax of 25%
and a MARR of 12% must choose between two mutually exclusive projects.
Project 1
Project 2
Initial Cost
11,000
33,000
Uniform annual benefit
3,000
9,000
Straight
Depreciation method
МACRS
Line
Depreciable life
З years
З уears
IRS approved salvage value for depreciation
2,000
purposes
Useful life
5 years
5 years
Actual market value at end of useful life
2,000
2,000

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