A company is considering the purchase of a capital asset for $120,000.Installation charges needed to make the asset serviceable will total $25,000. The asset will be depreciated over six years using the straight-line method and an estimated salvage value (SV6) of $22,000. The asset will be kept in service for six years, after which it will be sold for $27,000. During its useful life, it is estimated that the asset will produce annual revenues of$25,000. Operating and maintenance (O&M) costs are estimated to be$5,000 in the first year. These O&M costs are projected to increase by$500 per year each year thereafter. The after tax MARR is 15% and the effective tax rate is 25%.a. 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 −$72,738. By how much would the annual revenues have to increase to make the purchase of this asset justifiable on a before-tax basis? a. Calculate the after-tax cash flows and fill in the table below. (Round to the nearest dollar.)(A)BTCF, $(B)Depreciation, $(C) = (A) – (B)Taxable Income,D= - 0.25(C)Income Taxes, $(E) = (A) + (D)ATCF, $EOYMore Info- XDiscrete Compounding; i= 15%Uniform SeriesSingle PaymentUniform GradientGradientCompoundAmountPresentWorthFactorPresentSinkingCompoundAmountCapitalRecoveryFactorGradientPresentWorth FactorTo Find P To Find AUniformWorthFundSeriesFactorFactorFactorFactorFactorTo Find PGiven FTo Find AGiven FTo Find FTo Find FTo Find PTo Find AGiven PGiven PGiven AGiven AGiven GGiven GF/PP/FFIAPIAA/FA/PP/GA/G0.00000.46511.00000.00001.15000.61510.43800.35030.29830.26420.86961.62571.15000.86961.00000.75610.65750.57180.49720.43230.37590.32690.28430.24721.32252.15000.46510.75612.07122.28322.85501.52093.47254.99346.74240.28800.907141.74900.20033.78641.32631.722852.01143.35220.14835.77512.09722.44982.78133.09223.38328.75373.78450.11422.31312.66006.7.9368711.06684.16040.09040.07290.24040.222910.192483.059013.726816.78584.487312.48073.51794.04564.77160.05960.209614.75481020.30375.01880.04930.199316.9795PrintDone

Cost of capital assets =120000 Salvage value =25000 Life of assets =6 Straight line depreciation…

Answered: company is considering the purchase of…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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A company is considering the purchase of a capital asset for $120,000.
Installation charges needed to make the asset serviceable will total $25,000. The asset will be depreciated over six years using the straight-line method and an estimated salvage value (SV6) of $22,000. The asset will be kept in service for six years, after which it will be sold for $27,000. During its useful life, it is estimated that the asset will produce annual revenues of

$25,000. Operating and maintenance (O&M) costs are estimated to be

$5,000 in the first year. These O&M costs are projected to increase by

$500 per year each year thereafter. The after tax MARR is 15% and the effective tax rate is 25%.

a. 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 −$72,738. By how much would the annual revenues have to increase to make the purchase of this asset justifiable on a before-tax basis?

a. Calculate the after-tax cash flows and fill in the table below. (Round to the nearest dollar.)
(A)
BTCF, $
(B)
Depreciation, $
(C) = (A) – (B)
Taxable Income,
D= - 0.25(C)
Income Taxes, $
(E) = (A) + (D)
ATCF, $
EOY
More Info
- X
Discrete Compounding; i= 15%
Uniform Series
Single Payment
Uniform Gradient
Gradient
Compound
Amount
Present
Worth
Factor
Present
Sinking
Compound
Amount
Capital
Recovery
Factor
Gradient
Present
Worth Factor
To Find P To Find A
Uniform
Worth
Fund
Series
Factor
Factor
Factor
Factor
Factor
To Find P
Given F
To Find A
Given F
To Find F
To Find F
To Find P
To Find A
Given P
Given P
Given A
Given A
Given G
Given G
F/P
P/F
FIA
PIA
A/F
A/P
P/G
A/G
0.0000
0.4651
1.0000
0.0000
1.1500
0.6151
0.4380
0.3503
0.2983
0.2642
0.8696
1.6257
1.1500
0.8696
1.0000
0.7561
0.6575
0.5718
0.4972
0.4323
0.3759
0.3269
0.2843
0.2472
1.3225
2.1500
0.4651
0.7561
2.0712
2.2832
2.8550
1.5209
3.4725
4.9934
6.7424
0.2880
0.9071
4
1.7490
0.2003
3.7864
1.3263
1.7228
5
2.0114
3.3522
0.1483
5.7751
2.0972
2.4498
2.7813
3.0922
3.3832
8.7537
3.7845
0.1142
2.3131
2.6600
6.
7.9368
7
11.0668
4.1604
0.0904
0.0729
0.2404
0.2229
10.1924
8
3.0590
13.7268
16.7858
4.4873
12.4807
3.5179
4.0456
4.7716
0.0596
0.2096
14.7548
10
20.3037
5.0188
0.0493
0.1993
16.9795
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