Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 6, Problem 4PS
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Alternative Methods I and II are proposed for a security operation. The following is comparative information: Determine which is the better alternative based on an after-tax annual cost analysis with an effective income tax rate of 40% and an after-tax MARR of 15%, assuming the following methods of depreciation: Solve, a. SL b. MACRS.
Perform a present worth (PW)-based evaluation of the two alternatives below using a spreadsheet. The after-tax minimum acceptable
rate of return (MARR) is 8% per year, Modified Accelerated Cost Recovery System (MACRS) depreciation applies, and Te=40%. The (GI
-OE) estimate is made for the first 3 years; it is zero in year 4 when each asset is sold.
Alternative
First Cost, $
Salvage Value, Year 4,
$
GI-OE, $ per Year
Recovery Period, Years
X
-8,000
0
3,500
3
Y
-13,000
2,000
5,000
3
The PW for alternative X is determined to be $
The PW for alternative Yis determined to be $
Alternative (Click to select) is selected.
Depreciation The declining balance method is an account-
ing method in which the amount of depreciation taken each
year is a fixed percentage of the present value of the item. If
y is the value of the item in a given year, the depreciation
taken is ay for some depreciation rate a with 0< a < 1,
and the new value is (1 – aly.
(a) If the initial value of the item is yo, show that the value
after n years of depreciation is (1 – a)"yo.
(b) At the end of T years, the item has a salvage value of s
dollars. The taxpayer wishes to choose a depreciation
rate such that the value of the item after T years will
equal the salvage value (see the figure). Show that
a = 1-Vs/yo.
Chapter 6 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 6 - Cash flows Which of the following should be...Ch. 6 - Real and nominal flows Mr. Art Deco will be paid...Ch. 6 - Cash flows True or false? a. A projects...Ch. 6 - Depreciation How does the PV of depreciation tax...Ch. 6 - Working capital The following table tracks the...Ch. 6 - Prob. 6PSCh. 6 - Prob. 7PSCh. 6 - Mutually exclusive investments and project lives...Ch. 6 - Replacement decisions Machine C was purchased five...Ch. 6 - Prob. 10PS
Ch. 6 - Prob. 12PSCh. 6 - Working capital Each of the following statements...Ch. 6 - Depreciation Ms. T. Potts, the treasurer of Ideal...Ch. 6 - Project NPV and IRR A project requires an initial...Ch. 6 - Project NPV A widget manufacturer currently...Ch. 6 - Project NPV Marsha Jones has bought a used...Ch. 6 - Project NPV United Pigpen is considering a...Ch. 6 - Project NPV Hindustan Motors has been producing...Ch. 6 - Equivalent annual cash flows As a result of...Ch. 6 - Prob. 25PSCh. 6 - Replacement decisions Hayden Inc. has a number of...Ch. 6 - Prob. 27PSCh. 6 - Prob. 28PSCh. 6 - Prob. 29PSCh. 6 - Prob. 30PSCh. 6 - The cost of excess capacity The presidents...Ch. 6 - Effective tax rates One measure of the effective...Ch. 6 - Equivalent annual costs We warned that equivalent...
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- The Payback method takes the initial investment and divides it by the accelerated depreciation per year of the investment Group of answer choices True Falsearrow_forwardK You have a depreciation expense of $546,000 and a tax rate of 22%. What is your depreciation tax shield? The depreciation tax shield will be $ (Round to the nearest dollar.)arrow_forwardProject the OCFs for the next three years considering incomes of $165k, $170K and $180 respectively, and a depreciation of $15K, $16K and $18K respectively. Consider a tax of 25%. (Use the following format: "$11.111; $11.111; $11.111) Answer. $65.588;$69.325;$76.800 Then, calculate the NPV (of the three years projected, don't include the current one) if your investment is $150K and the cost of opportunity is 10% (use the following format: $11.111) Answer $24.619 Decide if you invest or not in this project (use the following format: "Yes" or "No") Answer NoI need the process pleasearrow_forward
- If straight-line and double-declining balance depreciation rates for n = 8 years are calculated and compared, the rates (in percent) for the second year are:arrow_forwardGive answer step by step and explanationarrow_forwardAn economic analysis is being performed in real (not actual) dollars. The company’s combined MARR is 10%, and the inflation rate is 4%. The asset has a first cost of $10,000. It will be depreciated as MACRS 3-year property using rates of 33.33%, 44.45%, 14.81%, and 7.41%. What depreciation amount will be shown in year 3 of the analysis?arrow_forward
- Pertinent information for two alternatives A and B is shown below. If i=10%/year and the effective income tax rate is 40%, answer the following true/false questions. Alt. A Alt.B 300,000 50,000 Basis, $ CFBT, $ MACRS Recovery, Years Salvage Value, $ Useful Life, Years O True 200,000 O False 40,000 5 20,000 6 The CFAT of Alt. B at the end of year 1 is less than $5,000. 5 30,000 7arrow_forwardPertinent information for two alternatives A and B is shown below. If i=10% / year and the effective income tax rate is 40%, answer the following true/false questions. Alt. A Alt.B 300,000 50,000 Basis, $ CFBT, $ MACRS Recovery, Years 5 Salvage Value, $ Useful Life, Years The CFAT at the end of year 3 for Alt. B is between $45,000-$50,000. True False 200,000 40,000 20,000 6 5 30,000 7arrow_forwardReturns of a Single Asset. Suppose you have invested in 2 assets whose annual returns are shown in the following table. If you invest $1000 in each asset: What will be the value of each asset at the end of year 5? What is the single annual rate which would yield the same value at the end of year 5? (meaning, what is the geometric average annual rate of return?) Year Asset A Asset B 1 -6.01% -9.98% 2 -10.27% 12.30% 3 13.75% 18.15% 4 24.31% -1.69% 5 20.88% 5.00% please use excelarrow_forward
- Can you explain don't understandarrow_forwardA company is considering a 3-year project with a projected net income of sh. 4M, 6M,5M in year 1, year 2 and year 3 respectively. The initial investment is sh. 40M and the salvage value is sh.2M.The company applies the straight line method for depreciating its assets, what is the Accounting Rate of Return? Assume a tax rate of 30% Select one: A. 26.3% B. 23.8% C.25% D. None of the abovearrow_forwardFor purposes of the property factor, leased property is generally valued at a. 10 times annual rentals. b. 8 times annual rentals. c. 5 times annual rentals. d. The fair market value of comparable assets. e. The present value of future rental payments.arrow_forward
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