a. Use the tabular format given in Figure 7-5 to compute the after-tax cash flows. b. Compute the after-tax present worth of the project, and use a uniform gradient in your formulation. c. The before-tax present worth of this asset is -$50,070. By how much would the annual revenues have to increase to make the purchase of this asset justifiable on a before-tax basis?
a. Use the tabular format given in Figure 7-5 to compute the after-tax cash flows. b. Compute the after-tax present worth of the project, and use a uniform gradient in your formulation. c. The before-tax present worth of this asset is -$50,070. By how much would the annual revenues have to increase to make the purchase of this asset justifiable on a before-tax basis?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text:7-22. A company is considering the purchase of a capital
asset for $100,000. Installation charges needed to make
the asset serviceable will total $30,000. The asset will be
depreciated over six years using the straight-line method
and an estimated salvage value (SV6) of $10,000. The
asset will be kept in service for six years, after which it will
be sold for $20,000. During its useful life, it is estimated
that the asset will produce annual revenues of $30,000.
Operating and maintenance (O&M) costs are estimated to
be $6,000 in the first year. These O&M costs are projected
to increase by $1,000 per year each year thereafter. The
after tax MARR is 12% and the effective tax rate is 40%.
(7.9)
a. Use the tabular format given in Figure 7-5 to compute
the after-tax cash flows.
b. Compute the after-tax present worth of the project,
and use a uniform gradient in your formulation.
c. The before-tax present worth of this asset is -$50,070.
By how much would the annual revenues have to
increase to make the purchase of this asset justifiable
on a before-tax basis?
Example 7-15
ΕΟΥ
1
2
3
5
7
8
9
10
10
BTCF
GDS
Cost Basis Recovery Depreciation
Rate
-180,000
36,000 180,000
0.2
36,000 180,000
0.32
36,000 180,000 0.192
36,000 180,000 0.1152
36,000 180,000 0.1152
36,000 180,000 0.0576
36,000
0
36,000
36,000
36,000
30,000
0
Taxable
Income
0
Tax
ATCF
-180,000
36,000
44,208
35,453
36,000
0
0
57,600 -21,600 8,208
34,560 1,440
-547
20,736 15,264 -5,800
20,736 15,264 -5,800
10,368 25,632 -9,740
30,200
30,200
26,260
36,000 -13,680
22,320
22,320
-13,680
22,320
36,000 -13,680
36,000
36,000 -13,680 22,320
30000 -11,400 18,600
Since the equipment was depreciated to zero in year 10, the sale price represents recaptured depreciation
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