Granny\'s Butter and Egg Business is such that she pays an effective tax rate of
ID: 1101780 • Letter: G
Question
Granny's Butter and Egg Business is such that she pays an effective tax rate of 40%. Granny is considering the purchase of a new Throb Churn for $25,000. This churn is a special handling device for food manufacture and has an estimated life of 4 years and a salvage value of $5000. The new churn is expected to increase net income by $8000 per year for each of the 4 years of use. If Granny works with an after-tax MARR of 10% and uses MACRS depreciation, should she buy the churn?
Note: the correst answer is AT NPW = $587. so please show me a step-by-step solution on how to get that. Thanks!
Explanation / Answer
Hi,
Please find the detailed answer as follows:
Step 1: Calculate Annual Cash Inflows (You need to Use MACRS 4 Year Table)
Step 2: Calculate NPW
NPW = -25000 + 8133/(1+.10)^1 + 9245/(1+.10)^2 + 6281/(1+.10)^3 + 5541/(1+.10)^4 + 5000*(1-.40)/(1+.10)^4 = 586.75 or 587
Answer is 587.
Year Before TaxCash Flow Depreciation Rate Depreciation Earnings Before Tax Tax Earnings After Tax Depreciation Annual Cash Inflows
(EAT + Depreciation) Year 1 8000 33.33% 8332.5 -332.5 -133.00 -199.50 8332.5 8133.00 Year 2 8000 44.45% 11112.5 -3112.5 -1245.00 -1867.50 11112.5 9245.00 Year 3 8000 14.81% 3702.5 4297.5 1719.00 2578.50 3702.5 6281.00 Year 4 8000 7.41% 1852.5 6147.5 2459.00 3688.50 1852.5 5541.00
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