Timber Products Incorporated is considering two alternative investments. One inv

Question

Timber Products Incorporated is considering two alternative investments. One investment is purchasing a heavy duty set of tools for Timber Cutting (Saws, Power Supplies ...). The cost is 200,000 dollars. The plan is to keep the equipment for ten years and then sell it for its Salvage Value of 20,000 dollars. The generated revenue after expenses will be 80,000 dollars for each of the ten years before tax cash flow. The alternate investment is in Fencing and Landscaping for the Central Office. The cost is 180,000 and the expected before tax cash flow would be 70,000 dollars after expenses since customer relations would improve with an improved corporate image. The landscaping would last 20 years. Salvage Value is negligible in this case. The period of comparison will be 7 years for the two choices. Show a full analysis of the yearly tax implications of each choice including depreciation, taxable income, taxes and after tax cash flow all for the seven years. Use the MACRS method of depreciation. Use present worth for the first seven years as the criteria for choosing. Income Tax rate is 40%.

Explanation / Answer

year heavy duty tool set fencing and landscaping tax shield on dep 1 tax shield on dep 2 cash flow 1 cash flow 2 0 -200000 -180000 -200000 -180000 1 80000 70000 11432 10288.8 91432 80288.8 2 80000 70000 19592 17632.8 99592 87632.8 3 80000 70000 13992 12592.8 93992 82592.8 4 80000 70000 9992 8992.8 89992 78992.8 5 80000 70000 7144 6429.6 87144 76429.6 6 80000 70000 7136 6422.4 87136 76422.4 7 80000 70000 7144 6429.6 87144 76429.6 NPV 245524.9849 211235.6487

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