Mary Meek, the owner of a flower shop, is considering buying a new van for deliv

Question

Mary Meek, the owner of a flower shop, is considering buying a new van for deliveries. She has estimated that the new van would result in a savings of $25,000 per year over the old van. The new van would cost $45,000 and will have a useful life of six years (MACRS 5-year recovery period) at which time t will be sold for $4,500. Mary uses a 15% after-tax MAR and the van would be depreciated using MACRS. Should Mary purchase the van on an after-tax basis? Mary uses a 40% tax rate. Determine the depreciation schedule for straight line, 150% declining balance, and MACRS depreciation methods. (10 points) a b. Using your MACRS depreciation values and the information above, determine if the van should be purchased on an after tax basis. (20 points) EOY Straight Line Depreciation150% DB Depreciation MACRS Depreciation 2 EOY CFBT TI CFAT ax 0

Explanation / Answer

EOY SLM 150% DB Depn MACRS Depn 1 6750                 10,125                9,000 2 6750                    7,594              14,400 3 6750                    5,695                8,640 4 6750                    4,271                5,184 5 6750                    3,204                5,184 6 6750                    2,403                2,592 Calculation of 150% DB method Net of salvage 0 40500 1                 10,125 30375 2                    7,594 22781 3                    5,695 17086 4                    4,271 12814 5                    3,204 9611 6                    2,403 7208 depreciation percentage in DB method: 25% (150%/6) Year Recovery period Depn Book Valoue 5-year Rate 0         45,000 1 20.00%              9,000         36,000 2 32.00%            14,400         21,600 3 19.20%              8,640         12,960 4 11.52%              5,184           7,776 5 11.52%              5,184           2,592 6 5.76%              2,592                 -   1/(1+.15)^n EOY Capital flow CFBT d TI Tax CFAT Dis Fac PV 0 -45000              -45,000 1     -45,000 1                 25,000                9,000             16,000              6,400                18,600 0.869565      16,174 2                 25,000              14,400             10,600              4,240                20,760 0.756144      15,698 3                 25,000                8,640             16,360              6,544                18,456 0.657516      12,135 4                 25,000                5,184             19,816              7,926                17,074 0.571753         9,762 5                 25,000                5,184             19,816              7,926                17,074 0.497177         8,489 6 2700                 25,000                2,592             22,408              8,963                18,737 0.432328         8,100 NPV      25,357 As NPV is >0 so marry should buy the van Salvage value before tax                4,500 Tax at 40%                1,800 Salvage value after tax                2,700

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