40 points) Buildog Shipping Inc. has purchased new cargo containers for $500,000

Question

40 points) Buildog Shipping Inc. has purchased new cargo containers for $500,000o. Bulidog will use GDS MACRS depreciation with a 5-year recovery period. It plans to use the containers for 4 years and then sell them at an estimated salvage value of $96,000. The company expects to realize net revenue of $170,000 each year for the next 4 years. Assume a federal tax of 38%, state tax of 11.29% per year, and an after tax MARR of 12% per year. 6. a) Calculate the total effective tax rate (round to nearest 96) b) Show the before tax cash flow c) Calculate each year's depreciation deduction d) Cakculate each year's taxable income e) Calculate each year's cash flow for income taxes f) Calculate each years After Tax Cash Flow (ATCF) 9) Calculate Present Worth of the ATCF for this investment with After Tax MARR of 12% h) Is this a good investment?

Explanation / Answer

a) Effective tax rate (t) = State Tax Rate + Federal rate (1 - State tax rate) Effective tax rate (t) = 11.29% + 38% x (1 - 11.29%) 45.00% b) Year Before Tax Cash Flow (b) Depreciation (c) Taxable Income (d) = (b) -(c) Cash Flow for Income Taxes (e) After Tax Cash Flow = BTCF(a) - Taxes(e) PV @ 12% Present Worth(f) 0 -$500,000.00 -$500,000.00 1 -$500,000.00 1 $170,000.00 $100,000.00 $70,000.00 $31,499.86 $138,500.14 0.8929 $123,660.84 2 $170,000.00 $160,000.00 $10,000.00 $4,499.98 $165,500.02 0.7972 $131,935.60 3 $170,000.00 $96,000.00 $74,000.00 $33,299.85 $136,700.15 0.7118 $97,300.47 4 $170,000.00 $57,600.00 $112,400.00 $50,579.78 $119,420.22 0.6355 $75,893.71 5 $170,000.00 $57,600.00 $112,400.00 $50,579.78 $119,420.22 0.5674 $67,762.24 6 $266,000.00 $28,800.00 $237,200.00 $106,739.53 $159,260.47 0.5066 $80,686.31 Present Worth $77,239.17 g) It is good investment because it has positive present worth. Depreciation Rate Depreciation 20.00% $100,000.00 32.00% $160,000.00 19.20% $96,000.00 11.52% $57,600.00 11.52% $57,600.00 5.76% $28,800.00

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