NPV with Income Taxes: Straight-Line versus Accelerated Depreciation Carl William, Inc. is a conservatively managed boat company whose motto is, "The old ways are the good ways." Management has always used straight-line depreciation for tax and external reporting purposes. Although they are reluctant to change, they are aware of the impact of taxes on a project's profitability. Required For a typical $240,000 investment in equipment with a five-year life and no salvage value, determine the present value of the advantage resulting from the use of double-declining balance depreciation as opposed to straight-line depreciation. Assume an income tax rate of 21% and a discount rate of 20%. Also assume that there will be a switch from double-declining balance to straight-line depreciation in the fourth year. Note: Round your answers below to the nearest whole dollar. Present value of double-declining balance tax shield $ Present value of straight-line tax shield x $ x Advantage of double-declining balance depreciation $

NPV with Income Taxes: Straight-Line versus Accelerated Depreciation Carl William, Inc. is a conservatively managed boat company whose motto is, "The old ways are the good ways." Management has always used straight-line depreciation for tax and external reporting purposes. Although they are reluctant to change, they are aware of the impact of taxes on a project's profitability. Required For a typical $240,000 investment in equipment with a five-year life and no salvage value, determine the present value of the advantage resulting from the use of double-declining balance depreciation as opposed to straight-line depreciation. Assume an income tax rate of 21% and a discount rate of 20%. Also assume that there will be a switch from double-declining balance to straight-line depreciation in the fourth year. Note: Round your answers below to the nearest whole dollar. Present value of double-declining balance tax shield $ Present value of straight-line tax shield x $ x Advantage of double-declining balance depreciation $

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)

10th Edition

ISBN:9781337902571

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter12: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 11P: REPLACEMENT ANALYSIS St. Johns River Shipyards is considering the replacement of an 8-year-old...

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Problem 1: American Company is considering a new product whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero-salvage value, and no change in net operating working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other American products and would reduce their pre-tax annual cash flows. What is the project's NPV? IRR? Briefly discuss the results. 10.0% -$5,000 $80,000 WACC Pre-tax cash flow reduction for other products (cannibalization) Investment cost (depreciable basis) Annual sales revenues Annual operating costs (excl. depreciation) Tax rate $67,500 -$25,000 35.0%
Payback; ARRPortsmouth Port Services creates and maintains shipping channels at various ports around the world. The company is considering the purchase of a $72,000,000 ocean-going dredge that has a five-year life and no salvage value. The company depreciates assets on a straight-line basis. This equipment’s expected annual cash flow on a before-tax basis is $18,600,000. Ports-mouth requires that an investment be recouped in less than five years and have a pre-tax accounting rate of return of at least 18 percent.a. Compute the payback period for this equipment.Note: Round your answer to one decimal place (i.e. round 4.3555 to 4.4).Payback period Answer yearsb. Compute the accounting rate of return for this equipment.Note: Round percentage to one decimal point (i.e. round 4.555% to 4.6%).Accounting rate of return Answer%c. Is the equipment an acceptable investment for Portsmouth? Answer
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4. Analysis of a replacement project At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacement analysis to determine which option is the best financial decision for the company. Price Co. is considering replacing an existing piece of equipment. The project involves the following: • The new equipment will have a cost of $9,000,000, and it is eligible for 100% bonus depreciation so it will be fully depreciated at t = 0. • The old machine was purchased before the new tax law, so it is being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciation left ($50,000 per year). • The new equipment will have a salvage value of $0 at the end of the project's life (year 6). The old machine has a current salvage value (at year 0) of $300,000. • Replacing the old machine will require an investment in net…
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4. Analysis of a replacement project At times firms will need to decide if they want to continue to use their current equipment or replace the equipment with newer equipment. The company will need to do replacement analysis to determine which option is the best financial decision for the company. Price Co. is considering replacing an existing piece of equipment. The project involves the following: • The new equipment will have a cost of $2,400,000, and it is eligible for 100% bonus depreciation so it will be fully depreciated at t = 0. • The old machine was purchased before the new tax law, so it is being depreciated on a straight-line basis. It has a book value of $200,000 (at year 0) and four more years of depreciation left ($50,000 per year). • The new equipment will have a salvage value of $0 at the end of the project's life (year 6). The old machine has a current salvage value (at year 0) of $300,000. • Replacing the old machine will require an investment in net operating working…
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Taxes are costs, and, therefore, changes in tax rates can affect consumer prices, project lives, and the value of existing firms. Evaluate the change in taxation on the valuation of the following project: Please find the project in the image attached to this question. Thank you Assumptions: Tax depreciation is straight-line over three years. Pre-tax salvage value is 25 in Year 3 and 50 if the asset is scrapped in Year 2. Tax on salvage value is 40% of the difference between salvage value and book value of the investment. The cost of capital is 20%. Please verify that the information above yields NPV = 0. If you decide to terminate the project in Year 2, what would be the NPV of the project? Suppose that the government now changes tax depreciation to allow a 100% write-off in Year 1. How does this affect your answers to parts a and b above? please explain in detail your Excel spreadsheet response.