12. Meane Company is trying to plan ahead for upcoming income tax changes expected after the 2024 election. Meane is considering acquiring an asset in January 2025 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 Tax Rates 2025 25% 2026 30% 2027 35% 2028 2029 40% 40% 2030 45% 2031* 45% * Rates are expected to remain at 45% after 2031. 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 greater NPV and the amount by which if exceeds the other alternative. b. Is there a required rate of return where the two methods would provide identical NPV's? If so, what is it?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter10: Capital Budgeting: Decision Criteria And Real Option
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12. Meane Company is trying to plan ahead for upcoming income tax changes expected after the 2024
election. Meane is considering acquiring an asset in January 2025 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
Tax Rates
2025
25%
2026
30%
2027
35%
2028
2029
40%
40%
2030
45%
2031*
45%
* Rates are expected to remain at 45% after 2031.
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 greater NPV
and the amount by which if exceeds the other alternative.
b. Is there a required rate of return where the two methods would provide identical NPV's? If so, what
is it?
Transcribed Image Text:12. Meane Company is trying to plan ahead for upcoming income tax changes expected after the 2024 election. Meane is considering acquiring an asset in January 2025 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 Tax Rates 2025 25% 2026 30% 2027 35% 2028 2029 40% 40% 2030 45% 2031* 45% * Rates are expected to remain at 45% after 2031. 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 greater NPV and the amount by which if exceeds the other 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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