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
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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?
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