NPV with Income Taxes: Straight-Line versus Accelerated DepreciationCarl 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 arereluctant to change, they are aware of the impact of taxes on a project's profitability.RequiredFor a typical $180,000 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-linedepreciation. 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 shieldxPresent value of straight-line tax shieldxAdvantage of double-declining balance depreciation $

Double decline balance method Depreciation rate = 1/useful life *100 *2 = 1/ 5 year *100*2 = 40%year…

Answered: NPV with Income Taxes: Straight-Line…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

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Problem 6P

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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…
8. Analysis of a replacement project Aa Aa 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. Johnson Co. is considering replacing an existing piece of equipment. The project involves the following: The new equipment will have a cost of $1,800,000, and it will be depreciated on a straight-line basis over a period of six years (years 1-6). • The old machine is also 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 working capital (NWC) of $60,000 that will be…
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%
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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
Consider a firm that has invested in a 5-year project. It faces a 40% corporate tax rate and its investment belongs to the CCA class with a 30% depreciation rate. A new "take care of equipment" program implemented by the firm allowed it to increase the salvage value of the equipment by $20,000. What was the effect of this program on NPV if the project's discount rate is 12%? $6,809 $8,106 $9,714 $11,349
1â€¢ The Congress Company has identified two methods for producing playing cards. One method involves using a machine having a fixed cost of $10,000 and variable costs of $1.00 per deck of cards. The other method would use a less expensive machine (fixed cost equals $5,000), but it would require greater variable costs ($1.50 per deck of cards). If the selling price per deck of cards will be the same under each method, at what level of output will the two methods produce the same net operating income (EBIT)?A.5,000 decksB.10,000 decksC.15,000 decksD.20,000 decksE.25,000 decks2â€¢ Spontaneous funds are generally defined as follows:A.Assets required per dollar of sales.B.A forecasting approach in which the forecasted percentage of sales for each item is held constant.C.Funds that a firm must raise externally through short-term or long-term borrowing and/or by selling new common or preferred stock.D.Funds that arise out of normal business operations from its…
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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8. 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 $600,000, and it will be depreciated on a straight-line basis over a period of six years (years 1-6). • The old machine is also 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 working capital (NWC) of $45,000 that will be recovered…
3. 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 will be depreciated on a straight-line basis over a period of six years (years 1–6). • The old machine is also 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 working capital (NOWC) of $50,000 that…

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