6. Problem 12.06 (Depreciation Methods)Charlene is evaluating a capital budgeting project that should last for 4 years. The project requires $825,000 of equipment and is eligible for 100% bonus depreciation. She is unsure whetherimmediately expensing the equipment or using straight-line depreciation is better for the analysis. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its4-year life (ignore the half-year convention for the straight-line method). The company's WACC is B%, and its tax rate is 30%.a. What would the depreciation expense be each year under each method? Enter your answers as positive values. Round your answers to the nearest dollarYear01eBook23AScenario 1(Straight-Line)S$S$$Scenario 2(Bonus Depreciation)S$$S$b. Which depreciation method would produce the higher NPV?-Select-How much higher would the NPV be under the preferred method? Do not round intermediate calculations. Round your answer to the nearest dollar$

NPV is also known as Net Present Value.. It is a capital budgeting technique which helps in decision…

Answered: eBook Charlene is evaluating a capital…

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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NEW PROJECT ANALYSIS You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $100,000, and it would cost another $15,000 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $45,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $14,000 increase in net operating working capital (spare parts inventory). The project would have no effect on revenues, but it should save the firm $67,000 per year in before-tax labor costs. The firm's marginal federal-plus-state tax rate is 40%. a. What is the initial investment outlay for the spectrometer, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent. Negative amount should be indicated by a minus sign. $ b. What are the project's annual cash flows in Years 1, 2, and 3? Round your answers to the nearest cent. In Year 1 $ In Year 2 $ In Year 3 $ c.…
Please see image for question. Options for B are; Straight-Line or Bonus Depreciation
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Penny and Daughter’s construction business is considering purchasing a new Bobcat. The equipment will cost $230,000 and is expected to last 14 years. The Bobcat has a salvage vale of $16,000. Calculate the depreciation AND book value for each year. You can create one table for a-d or you can create different tables for each. This problem will need to be done in excel. (30 points)a. Use straight-line depreciation. (5 points)b. Use declining-balance depreciation with a depreciation rate that ensures the book value equals the salvage vale in the last year of the life of the equipment. c. Use double declining balance depreciation. d. Use MACRS depreciation where the Bobcat is considered a 10 year property. e. Graph the Book values of each methods on a single graph. The graph should have points at each year for each BV and a line of each method. You will have 4 lines on your graph. You should include year 0 on your graph so that all four lines start at the same point. Each method should be…
Listen You want to buy a new equipment to replace an existing one. The new equipment will be depreciated down to zero using straight-line depreciation over its 10-year life. The project is a 10-year project. The market value of the new equipment at the end of year 10 is expected to be 0. The new equipment will replace an existing old equipment that has 10 years left of depreciation at a $3,000 a year. The estimated before tax proceeds from selling this existing equipment is $15,000 today. The market value in 10 years for this old equipment would be 0. The new equipment will generate annual cost savings of $12,000 before taxes. The tax rate is 20% and the discounting rate is 10%. What is the maximum price you are willing to pay today for the new equipment? For your answer, do not enter the dollar sign ($), DO NOT use commas, and you can round to zato decimals (the nearest dollar). Your Answer: Answer
National Integrated Systems (NIS), a global provider of heating and air conditioning is planning a project whose data is provided below. The project’s equipment has a 3 year tax life after which its salvage value will be zero. The machinery will be depreciated on a straight line basis over three years. Revenues and other operating costs are expected to be constant over the project’s life. What is the project’s cash flow in Year 1? Equipment Cost = $130,000Depreciation rate = 33.33%Annual Sales Revenue= $120,000Operating Costs (ex Depreciation) = $50,000 Tax Rate = 35%
A firm is considering investing in a new piece of equipment. The equipment would cost $500,000 and would have shipping and installation cost of $125,000. If purchased, the machine would have an estimated useful life of 5 years and would be depreciated via a 5-year MACRS schedule (e, 20.0%, 32.0%, 19.2 %, 11.5%, 11.5%, and 5.8%). Adoption of the project would also require an increase in working capital of $50,000. If the new equipment is purchased, an old piece of equipment (which is still useable for 5 more years) could be sold for $30,000. The old machine had been depreciated on a straight line basis and currently has a book value of zero. The machine would generate annual incremental revenues of $250,000 and annual incremental expenses of $50,000. It is estimated that the machine can be sold as scrap at the end of its 5 year useful life for $80,000. The required return on projects of this nature is 14% and the firm's marginal tax rate is 40%. What is cash flow from the project for…
dOfice eBook Kristin is evaluating a capital budgeting project that should last for 4 years. The project requires $525,000 of equipment. She is unsure what depreciation method to use in her analysis, straight-line or the 3-year MACRS accelerated method. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life (ignore the half-year convention for the straight-line method). The applicable MACRS depreciation rates are 33%, 45%, 15%, and 7%. The company's WACC is 9%, and its tax rate is 35%. a. What would the depreciation expense be each year under each method? Round your answers to the nearest cent. Year Scenario 1 Scenario 2 (Straight-Line) (MACRS) 1 $ 2 $ $ 3 $ $ 4 2$ $ b. Which depreciation method would produce the higher NPV? -Select- How much higher would the NPV be under the preferred method? Round your answer to the nearest cent.
Please help me to solve this problem
Flounder Manufacturing Company is considering three new projects, each requiring an equipment investment of $23,800. Each project will last for 3 years and produce the following cash flows. Year 1 2 3 Total (a) AA BB $7,600 $10,300 $11,600 10,300 10,600 10,300 9,600 15,600 $32,800 Click here to view PV tables. The salvage value for each of the projects is zero. Flounder uses straight-line depreciation. Flounder will not accept any project with a payback period over 2.2 years. Flounder's minimum required rate of return is 12%. Payback period (b) Your answer is correct. Compute each project's payback period. (Round answers to 2 decimal places, e.g. 52.75.) Most desirable $30,900 $31,800 Least desirable CC Indicating the most desirable project and the least desirable project using this method. Project CC eTextbook and Media 9,600 Project AA Most desirable Net present value $ Least desirable AA 2.42 years AA BB Compute the net present value of each project. (Use the above table.) (Round…

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