On January 1, 2021 Tractor Company will acquire a new asset that costs $390,000 and that is anticipated to have a salvage value of $34,000 at the end of four years. The new asset: qualifies as three-year property under the Modified Accelerated Cost Recovery System (MACRS) • will replace an old asset that currently has a tax basis of $96,000 and that can be sold on this date for $76,000 (net of selling costs) • will continue to generate the same operating revenues as the old asset ($130,000 per year). However, it is predicted that savings in cash operating costs will be experienced as follows: a total of $130,000 in each of the first three years, and $91,000 in the fourth year. ● Tractor is subject to a combined income tax rate, t, of 40% and rounds all computations to the nearest dollar. Tractor's fiscal year coincides with the calendar year. Assume that any gain or loss affects the taxes paid at the end of the year in which the gain or loss occurs. The company uses the net present value (NPV) method to analyze projects using the factors and rates presented below (based on a discount rate of 14%): Year 2021 2022 2023 2024 PV of $1 at 14% 0.877 0.769 0.675 0.592 PV of $1 Annuity at 14% 0.877 1.647 2.322 2.914 MACRS 33% 45% 15% 7% The relevant discounted operating cash flows (cost savings) that should be factored into Tractor Company's analysis are:
On January 1, 2021 Tractor Company will acquire a new asset that costs $390,000 and that is anticipated to have a salvage value of $34,000 at the end of four years. The new asset: qualifies as three-year property under the Modified Accelerated Cost Recovery System (MACRS) • will replace an old asset that currently has a tax basis of $96,000 and that can be sold on this date for $76,000 (net of selling costs) • will continue to generate the same operating revenues as the old asset ($130,000 per year). However, it is predicted that savings in cash operating costs will be experienced as follows: a total of $130,000 in each of the first three years, and $91,000 in the fourth year. ● Tractor is subject to a combined income tax rate, t, of 40% and rounds all computations to the nearest dollar. Tractor's fiscal year coincides with the calendar year. Assume that any gain or loss affects the taxes paid at the end of the year in which the gain or loss occurs. The company uses the net present value (NPV) method to analyze projects using the factors and rates presented below (based on a discount rate of 14%): Year 2021 2022 2023 2024 PV of $1 at 14% 0.877 0.769 0.675 0.592 PV of $1 Annuity at 14% 0.877 1.647 2.322 2.914 MACRS 33% 45% 15% 7% The relevant discounted operating cash flows (cost savings) that should be factored into Tractor Company's analysis are:
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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Transcribed Image Text:On January 1, 2021 Tractor Company will acquire a new asset that costs $390,000 and that is anticipated to have a salvage value of $34,000 at the end
of four years. The new asset:
qualifies as three-year property under the Modified Accelerated Cost Recovery System (MACRS)
• will replace an old asset that currently has a tax basis of $96,000 and that can be sold on this date for $76,000 (net of selling costs)
• will continue to generate the same operating revenues as the old asset ($130,000 per year). However, it is predicted that savings in cash operating
costs will be experienced as follows: a total of $130,000 in each of the first three years, and $91,000 in the fourth year.
●
Tractor is subject to a combined income tax rate, t, of 40% and rounds all computations to the nearest dollar. Tractor's fiscal year coincides with the
calendar year. Assume that any gain or loss affects the taxes paid at the end of the year in which the gain or loss occurs. The company uses the net
present value (NPV) method to analyze projects using the factors and rates presented below (based on a discount rate of 14%):
Year
2021
2022
2023
2024
PV of $1 at 14%
0.877
0.769
0.675
0.592
PV of $1 Annuity at 14%
0.877
1.647
2.322
2.914
MACRS
33%
45%
15%
7%
The relevant discounted operating cash flows (cost savings) that should be factored into Tractor Company's analysis are:
Transcribed Image Text:Multiple Choice
O
O
$32,323.
$181,116.
$213,439.
$220,999.
$224,167.
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