I need help answering the following question. Please show the formula and the st
ID: 2590569 • Letter: I
Question
I need help answering the following question.Please show the formula and the steps of solving.
An machine costs $87,500 with scrap value of $12,000 after 5 years. The asset is expected to increase revenue by $27,000 a year before maintenance costs of $8,200 a year. Assuming a tax rate of 33%, compute the net present value of the investment using a 5% interest rate and depreciation charges obtained from a. the straight line method of depreciation. b. the sum ofyears digits method ofdepreciation. c. the double declining balance method for two years followed by the straight line method. I need help answering the following question.
Please show the formula and the steps of solving.
An machine costs $87,500 with scrap value of $12,000 after 5 years. The asset is expected to increase revenue by $27,000 a year before maintenance costs of $8,200 a year. Assuming a tax rate of 33%, compute the net present value of the investment using a 5% interest rate and depreciation charges obtained from a. the straight line method of depreciation. b. the sum ofyears digits method ofdepreciation. c. the double declining balance method for two years followed by the straight line method.
Please show the formula and the steps of solving.
An machine costs $87,500 with scrap value of $12,000 after 5 years. The asset is expected to increase revenue by $27,000 a year before maintenance costs of $8,200 a year. Assuming a tax rate of 33%, compute the net present value of the investment using a 5% interest rate and depreciation charges obtained from a. the straight line method of depreciation. b. the sum ofyears digits method ofdepreciation. c. the double declining balance method for two years followed by the straight line method. An machine costs $87,500 with scrap value of $12,000 after 5 years. The asset is expected to increase revenue by $27,000 a year before maintenance costs of $8,200 a year. Assuming a tax rate of 33%, compute the net present value of the investment using a 5% interest rate and depreciation charges obtained from a. the straight line method of depreciation. b. the sum ofyears digits method ofdepreciation. c. the double declining balance method for two years followed by the straight line method.
Explanation / Answer
a)
Net increase in revenue = 27000 - 8200 = 18800
Revenue after tax = 18800*(1-0.33) = 12596
Depreciation tax shield as per straight line method = (87500-12000)/5 * 33% = 15100*33% = 4983
Total cash flow each year = 12596+4983 = 17579
After tax salvage value = 12000*(1-0.33) =12000*0.67 = 8040
Net Present Value = [17579* Present value annuity factor(5%,5) + 8040*Present value interest factor(5%,5)] - 87500
= (17579*4.3294 + 8040*0.7835) - 87500
= (76106.52 + 6299.34) - 87500 = -5094.14
b)
Calculation of depreciation and depreciation expense:
Year
Depreciation Base
Remaining life of machine
Depreciation fraction
Depreciation expense
Depreciation tax shield
1
87500-12000 = 75500
5
5/15
75500*5/15 = 25166.66
25166.66*33% = 8305
2
75500
4
4/15
75500*4/15 = 20133.33
20133.33*33% = 6644
3
75500
3
3/15
75500*3/15 = 15100
15100*33% = 4983
4
75500
2
2/15
75500*2/15 = 10066.66
10066.66*33% = 3322
5
75500
1
1/15
75500*1/15 = 5033.33
5033.33*33% = 1661
Calculation of Present value of cash flows:
Year
After tax Revenue
Depreciation tax shield
Total cash flow
Present Value factor @5%
Present Value
1
12596
8305
20901
0.952
19897.75
2
12596
6644
19240
0.907
17450.68
3
12596
4983
17579
0.864
15188.25
4
12596
3322
15918
0.823
13100.51
5
12596
1661
14257
0.783
11163.23
5
0
0
8040
0.783
6295.32
TOTAL
83095.74
Net Present value = 83095.74 – 87500 = -4404.26
c)
Calculation of depreciation and depreciation tax shield:
Year
Net Book Value (Beginning)
2* Straight line rate *Net Book Value
Net Book Value (end)
Depreciation tax shield
1
87500
2*20%*87500 = 35000
87500- 35000 = 52500
35000*33% = 11550
2
52500
2*20%*52500 = 21000
52500-21000 = 31500
21000*33% = 6930
3
31500
(31500-12000)/3 = 6500
31500-6500 = 25000
6500*33% = 2145
4
25000
6500
25000-6500 = 18500
2145
5
18500
6500
18500-6500 = 12000
2145
Calculation of Present value of cash flows:
Year
After tax Revenue
Depreciation tax shield
Total cash flow
Present Value factor @5%
Present Value
1
12596
11550
24146
0.952
22987
2
12596
6930
19526
0.907
17710
3
12596
2145
14741
0.864
12736
4
12596
2145
14741
0.823
12132
5
12596
2145
14741
0.783
11542
5
0
0
8040
0.783
6295
TOTAL
83402
Net Present value = 83402 – 87500 = -4098
Year
Depreciation Base
Remaining life of machine
Depreciation fraction
Depreciation expense
Depreciation tax shield
1
87500-12000 = 75500
5
5/15
75500*5/15 = 25166.66
25166.66*33% = 8305
2
75500
4
4/15
75500*4/15 = 20133.33
20133.33*33% = 6644
3
75500
3
3/15
75500*3/15 = 15100
15100*33% = 4983
4
75500
2
2/15
75500*2/15 = 10066.66
10066.66*33% = 3322
5
75500
1
1/15
75500*1/15 = 5033.33
5033.33*33% = 1661
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.