Straight-Line MACRS Depreclation Depreclation Year 1 .... Year 2 ... $ 9,000 $18,000 18,000 28,800 Year 3 18,000 17,280 .. Year 4 18,000 10,368 Year 5 ... 18,000 10,368 Year 6 .. 9,000 5,184 Totals... $90,000 $90,000 *The modified accelerated cost recovery system (MACRS) for depreciation is discussed in Chapter 10. Required 1. Prepare a five-column table that reports amounts (assuming use of straight-line depreciation) for each of the following for each of the six years: (a) pretax income before depreciation, (b) straight-line depreciation expense, (c) taxable income, (d) income taxes, and (e) net cash flow. Net cash flow equals the amount of income before depreciation minus the income taxes. (Round answers to the nearest dollar.) 2. Prepare a five-column table that reports amounts (assuming use of MACRS depreciation) for each of the following for each of the six years: (a) pretax income before depreciation, (b) MACRS deprecia- tion expense, (c) taxable income, (d) income taxes, and (e) net cash flow. Net cash flow equals the income amount before depreciation minus the income taxes. (Round answers to the nearest dollar.) 3. Compute the net present value of the investment if straight-line depreciation is used. Use 10% as the discount rate. (Round the net present value to the nearest dollar.) 4. Compute the net present value of the investment if MACRS depreciation is used. Use 10% as the dis- count rate. (Round the net present value to the nearest dollar.) Analysis Component 5. Which depreciation method (straight-line or MACRS) results in a higher net present value?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Manning Corporation is considering a new project requiring a $90,000 investment in test equipment with no salvage value. The project would produce $66,000 of pretax income before depreciation at the end of each of
the next six years. The company’s income tax rate is 40%. In compiling its tax return and computing its income tax payments, the company can choose between the two alternative depreciation schedules shown in the table.

Straight-Line
MACRS
Depreclation
Depreclation
Year 1 ....
Year 2 ...
$ 9,000
$18,000
18,000
28,800
Year 3
18,000
17,280
..
Year 4
18,000
10,368
Year 5 ...
18,000
10,368
Year 6 ..
9,000
5,184
Totals...
$90,000
$90,000
*The modified accelerated cost recovery system (MACRS) for
depreciation is discussed in Chapter 10.

Required
1. Prepare a five-column table that reports amounts (assuming use of straight-line depreciation) for each
of the following for each of the six years: (a) pretax income before depreciation, (b) straight-line
depreciation expense, (c) taxable income, (d) income taxes, and (e) net cash flow. Net cash flow
equals the amount of income before depreciation minus the income taxes. (Round answers to the
nearest dollar.)
2. Prepare a five-column table that reports amounts (assuming use of MACRS depreciation) for each of
the following for each of the six years: (a) pretax income before depreciation, (b) MACRS deprecia-
tion expense, (c) taxable income, (d) income taxes, and (e) net cash flow. Net cash flow equals the
income amount before depreciation minus the income taxes. (Round answers to the nearest dollar.)
3. Compute the net present value of the investment if straight-line depreciation is used. Use 10% as the
discount rate. (Round the net present value to the nearest dollar.)
4. Compute the net present value of the investment if MACRS depreciation is used. Use 10% as the dis-
count rate. (Round the net present value to the nearest dollar.)
Analysis Component
5. Which depreciation method (straight-line or MACRS) results in a higher net present value?

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