The equipment has a delivered cost of $57,000. An additional $3,000 is required to install the new equipment. The new control device falls into the 7-year class for depreciation and will be depreciated using MACRS as per the Tax Reform Act of 1986 and a further modification in 2005. At the end of 8 years, the estimated Salvage Value of the new equipment is $20,000.The existing control device has been in use for approximately 10 years, and it has been fully depreciated (that is, its book value is zero for the old device). However, its current market value for the old device is estimated to be $5,000. The applicable tax rate is 34%. The new control device requires lower maintenance costs and frees personnel who would otherwise monitor the system. In addition, it reduces product wastage. In total, it is estimated that during its eight-year life, the yearly savings will amount to $20,000 if the new control device is used. Yearly sales revenue is unchanged. The illustrative firm’s cost of capital is 16%. 4. What would be the effect on NPV and IRR if the new control device falls into the 5-year class for depreciation? Assume all the original info remains unchanged. Make an investment decision. 5. What would be the effect on the NPV if straight-line depreciation is used rather than MARCS? 6. What would be the effect of an investment tax credit (ITC) on the analysis? Calculate and interpret the NPV assuming a 10% ITC. 7. Suppose, since the new machine is more efficient, that it will require an immediate increase in working capital of $25,000 which is eliminated at the end of the machine's life. Calculate NPV and IRR and make investment decisions using each value.

Principles of Accounting Volume 1

19th Edition

ISBN:9781947172685

Author:OpenStax

Publisher:OpenStax

Chapter11: Long-term Assets

Section: Chapter Questions

Problem 13PA: Colquhoun International purchases a warehouse for $300,000. The best estimate of the salvage value...

See similar textbooks

Related questions

Question

The equipment has a delivered cost of $57,000. An additional $3,000 is required to install the new equipment. The new control device falls into the 7-year class for depreciation and will be depreciated using MACRS as per the Tax Reform Act of 1986 and a further modification in 2005. At the end of 8 years, the estimated Salvage Value of the new equipment is $20,000.The existing control device has been in use for approximately 10 years, and it has been fully depreciated (that is, its book value is zero for the old device). However, its current market value for the old device is estimated to be $5,000. The applicable tax rate is 34%. The new control device requires lower maintenance costs and frees personnel who would otherwise monitor the system. In addition, it reduces product wastage. In total, it is estimated that during its eight-year life, the yearly savings will amount to $20,000 if the new control device is used. Yearly sales revenue is unchanged. The illustrative firm’s cost of capital is 16%.

4. What would be the effect on NPV and IRR if the new control device falls into the 5-year class for depreciation? Assume all the original info remains unchanged. Make an investment decision.

5. What would be the effect on the NPV if straight-line depreciation is used rather than MARCS?

6. What would be the effect of an investment tax credit (ITC) on the analysis? Calculate and interpret the NPV assuming a 10% ITC.

7. Suppose, since the new machine is more efficient, that it will require an immediate increase in working capital of $25,000 which is eliminated at the end of the machine's life. Calculate NPV and IRR and make investment decisions using each value.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 4 steps with 4 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Section 179 Deduction and Modified Accelerated Cost Recovery System (MACRS) Depreciation

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.