12. Meane Company is trying to plan ahead for upcoming income tax changes expected after the 2020 election. Meane is considering acquiring an asset in January 2021 for a cost of $600,000 that will last for eight years and have a residual value of $80,000 at that time. The asset is expected to bring in net cash benefits of $300,000 a year before income taxes over the life of the project. Meane's accountant is trying to chose the best depreciation method, i.e., the one that contributes to the maximum Net Present Value of the project, given the expected applicable income tax rates: Year 2021 2022 2023 2024 2025 2026 2027* Tax Rates 25% 30% 35% 40% 40% 45% 45% * Rates are expected to remain at 45% after 2027. For income tax purposes, the company will depreciate the asset over a five-year period to a zero salvage value using the Straight-line method or as a five-year MACRS asset (See Problem 11). Required: a. Using the company's 14% required rate of return, determine which method leads to the greatest NPV and the amount by which if exceeds the next best alternative. b. Is there a required rate of return where the two methods would provide identical NPV's? If so, what is it?
12. Meane Company is trying to plan ahead for upcoming income tax changes expected after the 2020 election. Meane is considering acquiring an asset in January 2021 for a cost of $600,000 that will last for eight years and have a residual value of $80,000 at that time. The asset is expected to bring in net cash benefits of $300,000 a year before income taxes over the life of the project. Meane's accountant is trying to chose the best depreciation method, i.e., the one that contributes to the maximum Net Present Value of the project, given the expected applicable income tax rates: Year 2021 2022 2023 2024 2025 2026 2027* Tax Rates 25% 30% 35% 40% 40% 45% 45% * Rates are expected to remain at 45% after 2027. For income tax purposes, the company will depreciate the asset over a five-year period to a zero salvage value using the Straight-line method or as a five-year MACRS asset (See Problem 11). Required: a. Using the company's 14% required rate of return, determine which method leads to the greatest NPV and the amount by which if exceeds the next best alternative. b. Is there a required rate of return where the two methods would provide identical NPV's? If so, what is it?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
How to do it with detailed explanations
![12. Meane Company is trying to plan ahead for upcoming income tax changes expected after the 2020
election. Meane is considering acquiring an asset in January 2021 for a cost of $600,000 that will last for
eight years and have a residual value of $80,000 at that time. The asset is expected to bring in net cash
benefits of $300,000 a year before income taxes over the life of the project.
Meane's accountant is trying to chose the best depreciation method, i.e., the one that contributes to the
maximum Net Present Value of the project, given the expected applicable income tax rates:
Year
2021
2022
2023
2024
2025
2026
2027*
Tax Rates
25%
30%
35%
40%
40%
45%
45%
* Rates are expected to remain at 45% after 2027.
For income tax purposes, the company will depreciate the asset over a five-year period to a zero salvage value
using the Straight-line method or as a five-year MACRS asset (See Problem 11).
Required:
a. Using the company's 14% required rate of return, determine which method leads to the greatest NPV
and the amount by which if exceeds the next best alternative.
b. Is there a required rate of return where the two methods would provide identical NPV's? If so, what
is it?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fb5e6321f-b541-4660-9f33-538fe3558103%2F7df85424-4439-41d7-b089-67cbeeae5f5f%2Fzvb4pni_processed.png&w=3840&q=75)
Transcribed Image Text:12. Meane Company is trying to plan ahead for upcoming income tax changes expected after the 2020
election. Meane is considering acquiring an asset in January 2021 for a cost of $600,000 that will last for
eight years and have a residual value of $80,000 at that time. The asset is expected to bring in net cash
benefits of $300,000 a year before income taxes over the life of the project.
Meane's accountant is trying to chose the best depreciation method, i.e., the one that contributes to the
maximum Net Present Value of the project, given the expected applicable income tax rates:
Year
2021
2022
2023
2024
2025
2026
2027*
Tax Rates
25%
30%
35%
40%
40%
45%
45%
* Rates are expected to remain at 45% after 2027.
For income tax purposes, the company will depreciate the asset over a five-year period to a zero salvage value
using the Straight-line method or as a five-year MACRS asset (See Problem 11).
Required:
a. Using the company's 14% required rate of return, determine which method leads to the greatest NPV
and the amount by which if exceeds the next best alternative.
b. Is there a required rate of return where the two methods would provide identical NPV's? If so, what
is it?
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
![Essentials Of Investments](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781260013924/9781260013924_smallCoverImage.jpg)
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
![FUNDAMENTALS OF CORPORATE FINANCE](https://www.bartleby.com/isbn_cover_images/9781260013962/9781260013962_smallCoverImage.gif)
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Essentials Of Investments](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781260013924/9781260013924_smallCoverImage.jpg)
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
![FUNDAMENTALS OF CORPORATE FINANCE](https://www.bartleby.com/isbn_cover_images/9781260013962/9781260013962_smallCoverImage.gif)
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Foundations Of Finance](https://www.bartleby.com/isbn_cover_images/9780134897264/9780134897264_smallCoverImage.gif)
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
![Fundamentals of Financial Management (MindTap Cou…](https://www.bartleby.com/isbn_cover_images/9781337395250/9781337395250_smallCoverImage.gif)
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
![Corporate Finance (The Mcgraw-hill/Irwin Series i…](https://www.bartleby.com/isbn_cover_images/9780077861759/9780077861759_smallCoverImage.gif)
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education