Machine Replacement with Tax Considerations; Spreadsheet Application; DoubleDeclining-Balance (DDB) Depreciation A computer chip manufacturer spent $2,500,000to develop a special-purpose molding machine. The machine has been used for one year and isexpected to be obsolete after an additional 3 years. The company uses straight-line (SLN) depreciation for this machine.At the beginning of the second year, a machine salesperson offers a new, vastly more efficient machine. This machine will cost $2,000,000, reduce annual cash manufacturing costs from$1,800,000 to $1,000,000, and have zero disposal value at the end of 3 years. Management hasdecided to use the double-declining-balance (DDB) depreciation method for tax purposes for thismachine if purchased. (Note: Make sure to switch to SLN depreciation in year 3 to ensure that theentire cost of the asset is written off. You may find it useful to use the VDB function in Excel tocalculate depreciation charges.)The old machine’s salvage value is $300,000 now and is expected to be $50,000 three years fromnow; however, no salvage value is provided in calculating straight-line (SLN) depreciation on theold machine for tax purposes. The firm’s income tax rate is 45%. The firm desires to earn a minimum after-tax rate of return of 8%.Required 1. What is the present value (rounded to the nearest whole dollar) of tax savings associated with depreciating the existing machine (using the straight-line method)? 2. What is the present value (rounded to the nearest whole dollar) of tax savings associated with depreciating the new machine using the double-declining-balance method? Use the VDB built-in function inExcel to calculate depreciation deductions. 3. What is the present value of net after-tax cost associated with the existing machine? Round your answerto the nearest whole dollar. (Hint: There will be three items to consider.) 4. What is the present value (rounded to the nearest whole dollar) of the net after-tax cost of using thereplacement (new) machine? 5. What is the estimated net present value (NPV) of the decision to replace the existing machine with thenew machine. Round your final answer to the nearest whole dollar. (Note: Use the PV and NPV functions in Excel to calculate all present value amounts.)
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Machine Replacement with Tax Considerations; Spreadsheet Application; DoubleDeclining-Balance (DDB)
to develop a special-purpose molding machine. The machine has been used for one year and is
expected to be obsolete after an additional 3 years. The company uses straight-line (SLN) depreciation for this machine.
At the beginning of the second year, a machine salesperson offers a new, vastly more efficient machine. This machine will cost $2,000,000, reduce annual cash
$1,800,000 to $1,000,000, and have zero disposal value at the end of 3 years. Management has
decided to use the double-declining-balance (DDB) depreciation method for tax purposes for this
machine if purchased. (Note: Make sure to switch to SLN depreciation in year 3 to ensure that the
entire cost of the asset is written off. You may find it useful to use the VDB function in Excel to
calculate depreciation charges.)
The old machine’s salvage value is $300,000 now and is expected to be $50,000 three years from
now; however, no salvage value is provided in calculating straight-line (SLN) depreciation on the
old machine for tax purposes. The firm’s income tax rate is 45%. The firm desires to earn a minimum after-tax
Required
1. What is the present value (rounded to the nearest whole dollar) of tax savings associated with depreciating the existing machine (using the straight-line method)?
2. What is the present value (rounded to the nearest whole dollar) of tax savings associated with depreciating the new machine using the double-declining-balance method? Use the VDB built-in function in
Excel to calculate depreciation deductions.
3. What is the present value of net after-tax cost associated with the existing machine? Round your answer
to the nearest whole dollar. (Hint: There will be three items to consider.)
4. What is the present value (rounded to the nearest whole dollar) of the net after-tax cost of using the
replacement (new) machine?
5. What is the estimated
new machine. Round your final answer to the nearest whole dollar.
(Note: Use the PV and NPV functions in Excel to calculate all present value amounts.)
Trending now
This is a popular solution!
Step by step
Solved in 4 steps