Fundamental Accounting Principles -Hardcover
22nd Edition
ISBN: 9780077862275
Author: John J Wild, Ken Shaw Accounting Professor, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
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Question
Chapter 25, Problem 3APSA
To determine
Concept Introduction:
NPV:
Requirement-1:
To determine: The Net
Expert Solution
Answer to Problem 3APSA
Solution: The Net cash flows using the straight line method of depreciation are as follows:
| Year | (e) Net Cash Flows |
| 1 | $ 43,200 |
| 2 | $ 46,800 |
| 3 | $ 46,800 |
| 4 | $ 46,800 |
| 5 | $ 46,800 |
| 6 | $ 43,200 |
Explanation of Solution
Explanation: The Net cash flows using the straight line method of depreciation are explained as follows:
| Year | (a) Pretax Income before depreciation | (b) Straight Line Depreciation expense | (c) Taxable Income | (d) Income Taxes | (e) Net Cash Flows |
| c =a-b | d=c*40% | e=a-d | |||
| 1 | $ 66,000 | $ 9,000 | $ 57,000 | $ 22,800 | $ 43,200 |
| 2 | $ 66,000 | $ 18,000 | $ 48,000 | $ 19,200 | $ 46,800 |
| 3 | $ 66,000 | $ 18,000 | $ 48,000 | $ 19,200 | $ 46,800 |
| 4 | $ 66,000 | $ 18,000 | $ 48,000 | $ 19,200 | $ 46,800 |
| 5 | $ 66,000 | $ 18,000 | $ 48,000 | $ 19,200 | $ 46,800 |
| 6 | $ 66,000 | $ 9,000 | $ 57,000 | $ 22,800 | $ 43,200 |
Conclusion
Conclusion:
Hence, the net cash flows are calculated using the straight line method of depreciation.
To determine
Requirement-2:
To determine: The Net cash flows using the MACRS method of depreciation.
Expert Solution
Answer to Problem 3APSA
Solution: The Net cash flows using the MACRS method of depreciation are as follows:
| Year | (e) Net Cash Flows |
| 1 | $ 46,800 |
| 2 | $ 51,120 |
| 3 | $ 46,512 |
| 4 | $ 43,747 |
| 5 | $ 43,747 |
| 6 | $ 41,674 |
Explanation of Solution
Explanation: The Net cash flows using the MACRS method of depreciation are explained as follows:
| Year | (a) Pretax Income before depreciation | (b) MACRS Depreciation expense | (c) Taxable Income | (d) Income Taxes | (e) Net Cash Flows |
| c =a-b | d=c*40% | e=a-d | |||
| 1 | $ 66,000 | $ 18,000 | $ 48,000 | $ 19,200 | $ 46,800 |
| 2 | $ 66,000 | $ 28,800 | $ 37,200 | $ 14,880 | $ 51,120 |
| 3 | $ 66,000 | $ 17,280 | $ 48,720 | $ 19,488 | $ 46,512 |
| 4 | $ 66,000 | $ 10,368 | $ 55,632 | $ 22,253 | $ 43,747 |
| 5 | $ 66,000 | $ 10,368 | $ 55,632 | $ 22,253 | $ 43,747 |
| 6 | $ 66,000 | $ 5,184 | $ 60,816 | $ 24,326 | $ 41,674 |
Conclusion
Conclusion:
Hence, the net cash flows are calculated using the MACRS method of depreciation.
To determine
Requirement-3:
To determine: The Net Present value of the investment using the Straight line method of depreciation.
Expert Solution
Answer to Problem 3APSA
Solution: The Net Present value of the investment using the Straight line method of depreciation is $108,518
Explanation of Solution
Explanation: The Net Present value of the investment using the Straight line method of depreciation is calculated as follows:
| Year | (a) Pretax Income before depreciation | (b) Straight Line Depreciation expense | (c) Taxable Income | (d) Income Taxes | (e) Net Cash Flows | PVF (10%) | PV |
| c =a-b | d=c*40% | e=a-d | f | e*f | |||
| 1 | $ 66,000 | $ 9,000 | $ 57,000 | $ 22,800 | $ 43,200 | 0.9091 | $ 39,273 |
| 2 | $ 66,000 | $ 18,000 | $ 48,000 | $ 19,200 | $ 46,800 | 0.8264 | $ 38,676 |
| 3 | $ 66,000 | $ 18,000 | $ 48,000 | $ 19,200 | $ 46,800 | 0.7513 | $ 35,161 |
| 4 | $ 66,000 | $ 18,000 | $ 48,000 | $ 19,200 | $ 46,800 | 0.6830 | $ 31,964 |
| 5 | $ 66,000 | $ 18,000 | $ 48,000 | $ 19,200 | $ 46,800 | 0.6209 | $ 29,058 |
| 6 | $ 66,000 | $ 9,000 | $ 57,000 | $ 22,800 | $ 43,200 | 0.5645 | $ 24,386 |
| Present value of Cash inflows | $ 198,518 | ||||||
| Less: Initial Investment | $ (90,000) | ||||||
| Net present value (NPV) | $ 108,518 | ||||||
Conclusion
Conclusion:
Hence, the Net Present value of the investment using the Straight line method of depreciation is $108,518
To determine
Requirement-4:
To determine: The Net Present value of the investment using the MACRS method of depreciation.
Expert Solution
Answer to Problem 3APSA
Solution: The Net Present value of the investment using the MACRS method of depreciation is $110,303
Explanation of Solution
Explanation: The Net Present value of the investment using the MACRS method of depreciation is calculated as follows:
| Year | (a) Pretax Income before depreciation | (b) MACRS Depreciation expense | (c) Taxable Income | (d) Income Taxes | (e) Net Cash Flows | PVF (10%) | PV |
| c =a-b | d=c*40% | e=a-d | f | e*f | |||
| 1 | $ 66,000 | $ 18,000 | $ 48,000 | $ 19,200 | $ 46,800 | 0.9091 | $ 42,546 |
| 2 | $ 66,000 | $ 28,800 | $ 37,200 | $ 14,880 | $ 51,120 | 0.8264 | $ 42,246 |
| 3 | $ 66,000 | $ 17,280 | $ 48,720 | $ 19,488 | $ 46,512 | 0.7513 | $ 34,944 |
| 4 | $ 66,000 | $ 10,368 | $ 55,632 | $ 22,253 | $ 43,747 | 0.6830 | $ 29,879 |
| 5 | $ 66,000 | $ 10,368 | $ 55,632 | $ 22,253 | $ 43,747 | 0.6209 | $ 27,163 |
| 6 | $ 66,000 | $ 5,184 | $ 60,816 | $ 24,326 | $ 41,674 | 0.5645 | $ 23,525 |
| Present value of Cash inflows | $ 200,303 | ||||||
| Less: Initial Investment | $ (90,000) | ||||||
| Net present value (NPV) | $ 110,303 | ||||||
Conclusion
Conclusion:
Hence, the Net Present value of the investment using the MACRS method of depreciation is $110,303
To determine
Requirement-5:
To state: The reason of increase in Net Present value using the MACRS method of depreciation.
Expert Solution
Answer to Problem 3APSA
Solution: The reason of increase in Net Present value using the MACRS method of depreciation is the higher amount of depreciation in earlier years of the project.
Explanation of Solution
Explanation: The MACRS method depreciates the asset using the higher rate in the beginning years of the life of the assets which results in higher deprecation expense and lower income tax. Hence, the net cash flows and Net present value using the MACRS depreciation method are higher than using the straight line depreciation method.
Conclusion
Conclusion: Hence, the reason of increase in Net Present value using the MACRS method of depreciation is the higher amount of depreciation in earlier years of the project.
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Chapter 25 Solutions
Fundamental Accounting Principles -Hardcover
Ch. 25 - Prob. 1DQCh. 25 - What is capital budgeting?Ch. 25 - Prob. 3DQCh. 25 - Prob. 4DQCh. 25 - Prob. 5DQCh. 25 - Prob. 6DQCh. 25 - Prob. 7DQCh. 25 - Prob. 8DQCh. 25 - Prob. 9DQCh. 25 - Prob. 10DQ
Ch. 25 - Prob. 11DQCh. 25 - Prob. 12DQCh. 25 - Prob. 13DQCh. 25 - Prob. 14DQCh. 25 - Prob. 15DQCh. 25 - Prob. 1QSCh. 25 - Prob. 2QSCh. 25 - Prob. 3QSCh. 25 - Prob. 4QSCh. 25 - Prob. 5QSCh. 25 - Prob. 6QSCh. 25 - Prob. 7QSCh. 25 - Prob. 8QSCh. 25 - Prob. 9QSCh. 25 - Prob. 10QSCh. 25 - Prob. 11QSCh. 25 - Prob. 12QSCh. 25 - Prob. 13QSCh. 25 - Prob. 14QSCh. 25 - Relevant costs C1 Label each of the following...Ch. 25 - Prob. 16QSCh. 25 - Prob. 17QSCh. 25 - Prob. 18QSCh. 25 - Prob. 19QSCh. 25 - Sell or process further Al Holmes Company produces...Ch. 25 - Prob. 21QSCh. 25 - Prob. 22QSCh. 25 - Prob. 23QSCh. 25 - Prob. 24QSCh. 25 - Prob. 25QSCh. 25 - Prob. 26QSCh. 25 - Prob. 27QSCh. 25 - Prob. 1ECh. 25 - Prob. 2ECh. 25 - Prob. 3ECh. 25 - Prob. 4ECh. 25 - Prob. 5ECh. 25 - Prob. 6ECh. 25 - Prob. 7ECh. 25 - Prob. 8ECh. 25 - Prob. 9ECh. 25 - Prob. 10ECh. 25 - Prob. 11ECh. 25 - Prob. 12ECh. 25 - Prob. 13ECh. 25 - Prob. 14ECh. 25 - Prob. 15ECh. 25 - Exercise 25-16 Relevant costs C1 Complete the...Ch. 25 - Prob. 17ECh. 25 - Prob. 18ECh. 25 - Prob. 19ECh. 25 - Prob. 20ECh. 25 - Prob. 21ECh. 25 - Prob. 22ECh. 25 - Prob. 23ECh. 25 - Prob. 24ECh. 25 - Prob. 25ECh. 25 - Prob. 26ECh. 25 - Prob. 27ECh. 25 - Prob. 1APSACh. 25 - Prob. 2APSACh. 25 - Prob. 3APSACh. 25 - Prob. 4APSACh. 25 - Prob. 5APSACh. 25 - Prob. 6APSACh. 25 - Prob. 1BPSBCh. 25 - Prob. 2BPSBCh. 25 - Prob. 3BPSBCh. 25 - Prob. 4BPSBCh. 25 - Prob. 5BPSBCh. 25 - Prob. 6BPSBCh. 25 - Prob. 25SPCh. 25 - Prob. 1BTNCh. 25 - Prob. 2BTNCh. 25 - Prob. 3BTNCh. 25 - Payback period, accounting rate of return, net...Ch. 25 - Many companies must determine whether to...Ch. 25 -
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