On January 1, 2021 Tractor Company will acquire a new asset that costs $450,000 and that is anticipated to have a salvage value of $31,000 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 $86,000 and that can be sold on this date for $66,000 (net of selling costs) will continue to generate the same operating revenues as the old asset ($170,000 per year). However, it is predicted that savings in cash operating costs will be experienced as follows: a total of $80,000 in each of the first three years, and $93,000 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 PV of $1 at 14% PV of $1 Annuity at 14% MACRS 2021 0.877 0.877 33% 2022 0.769 1.647 45% 2023 0.675 2.322 15% 2024 0.592 2.914 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 $450,000 and that is anticipated to have a salvage value of $31,000 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 $86,000 and that can be sold on this date for $66,000 (net of selling costs) will continue to generate the same operating revenues as the old asset ($170,000 per year). However, it is predicted that savings in cash operating costs will be experienced as follows: a total of $80,000 in each of the first three years, and $93,000 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 PV of $1 at 14% PV of $1 Annuity at 14% MACRS 2021 0.877 0.877 33% 2022 0.769 1.647 45% 2023 0.675 2.322 15% 2024 0.592 2.914 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
Related questions
Question
On January 1, 2021 Tractor Company will acquire a new asset that costs $450,000 and that is anticipated to have a salvage value of $31,000 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 $86,000 and that can be sold on this date for $66,000 (net of selling costs)
- will continue to generate the same operating revenues as the old asset ($170,000 per year). However, it is predicted that savings in cash operating costs will be experienced as follows: a total of $80,000 in each of the first three years, and $93,000 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
| Year | PV of $1 at 14% | PV of $1 |
MACRS |
|---|---|---|---|
| 2021 | 0.877 | 0.877 | 33% |
| 2022 | 0.769 | 1.647 | 45% |
| 2023 | 0.675 | 2.322 | 15% |
| 2024 | 0.592 | 2.914 | 7% |
The relevant discounted operating cash flows (cost savings) that should be factored into Tractor Company's analysis are:
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education