Manning Corporation is considering a new project requiring a $90,000 investment

Question

Manning Corporation is considering a new project requiring a $90,000 investment in test equipment with no salvage value. The project would produce $69,000 of pretax income before depreciation at the end of each of the next six years. The company's income tax rate is 38% In compiling its tax return and computing its income tax payments, the company can choose between the two alternative depreciation schedules shown in the table. (FV of $1, PV of $1. FVA of $1 and PVA of $D (Use appropriate factorts) from the tebles provided.) aight-Line Year 1 $ 18,000 Year 2 Year 3 Year 4 Year 5 Year 6 $ 9,000 18,000 18,000 18,000 18,000 9,000 28,800 17.280 10,368 10,368 5,184 Totals $90,000 $90,000 References Probiem 25-3A Computation of cash flows and net preserd vaiues with atenative depreciation methods LO P3 Section Break SAMSU 2 5

Explanation / Answer

Annual Cash Flows under Straight Line Depreciation

Year-1 = (69,000 - 9,000)*0.62 + 9,000 = $46,200

Year-2 = (69,000-18,000)*0.62 + 18,000 = $49,620

Year-3 = (69,000-18,000)*0.62 + 18,000 = $49,620

Year-4= (69,000-18,000)*0.62 + 18,000 = $49,620

Year-5 = (69,000-18,000)*0.62 + 18,000 = $49,620

Year-6 = ((69,000 - 9,000)*0.62 + 9,000 = $46,200

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NPV under Straight Line Depreciation = 46200/1.10 + 49,620/(1.10^2) + 49,620/(1.10^3) + 49,620/(1.10^4) + 49,620/(1.10^5) + 46,200/(1.10^6) - 90,000

=211,068 - 90,000

=$121,068

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Annual Cash Flows under MACRS Depreciation

Year-1 = (69,000-18,000)*0.62 + 18,000 = $49,620

Year-2 = (69,000-28,800)*0.62 + 28,800 = $53,724

Year-3 = (69,000-17,280)*0.62 + 17,280 = $49,346

Year-4 = (69,000-10,368)*0.62 + 10,368 = $46,720

Year-5 = (69,000-10,368)*0.62 + 10,368 = $46,720

Yaer-6 = (69,000-5,184)*0.62 + 5,184 = $44,750

..

NPV under MACRS = 49,620/1.10 + 53,724/(1.10^2) + 49,346/(1.10^3) + 46,720/(1.10^4) + 46,720/(1.10^5) + 44,750/(1.10^6) - 90,000

= 212,764 - 90,000

= $122,764

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