If the investment is desirable or not.
Answer to Problem 22P
The investment is not desirable.
Explanation of Solution
Concept used:
Write the expression to calculate the
Here, the depreciation is
Write the expression to calculate cumulative depreciation.
Here, the cumulative depreciation is
Write the expression to calculate the book value.
Here, the book value of the current year is
Write the expression to calculate the depreciation by straight line method.
Here, the depreciation is
Write the expression to calculate the depreciation recaparture.
Here, the depreciation recapture is
Calculations:
All values are taken in
Calculate the depreciation for year
Substitute
Calculate the cumulative depreciation for year
Substitute
Calculate the book value for year
Substitute
Calculate the depreciation for year
Substitute
Calculate the cumulative depreciation for year
Substitute
Calculate the book value for year
Substitute
Calculate the depreciation for year
Substitute
Calculate the cumulative depreciation for year
Substitute
Calculate the book value for year
Substitute
Calculate the depreciation for year
Substitute
Calculate the cumulative depreciation for year
Substitute
Calculate the book value for year
Substitute
The depreciation for year
Calculate the depreciation for year
Substitute
Calculate the cumulative depreciation for year
Substitute
Calculate the book value for year
Substitute
Substitute
Calculate the cumulative depreciation for year
Substitute
Calculate the book value for year
Substitute
Tabulate the obtained above values.
Year | Deprecation | Cumulative Depreciation | Book Value |
The book value obtained after the end of
Substitute
Tabulate the values for before tax and after cash flows.
Year | Before taxCash flow |
Depreciation |
Taxable income |
Income taxes |
After taxCash flow |
Now calculate the after tax return.
Write the expression to calculate the rate when
Here the present value is
Substitute
Solve Equation (VI) for the value of
Conclusion:
The after tax rate of return is less than expected rate of return.
Hence the investment is not desirable.
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