NAME: SHOW ALL WORK Problem 2 (50pts) Congratulations, you recently inherited a

Question

NAME: SHOW ALL WORK Problem 2 (50pts) Congratulations, you recently inherited a farm, and decided to purchase a new road-safe tractor unit tox $98,000! You plan on keeping the tractor unit for the next six years, at which time you will sell it for its salvage value of $8,000. Over these six years, you expect annual revenues due to the new tractor to be $20,000 per year. Assuming a tax rate of 40% and a MARR of 6%, Calculate the annual depreciation and book value of the tractor, for each of the six years, using the following methods: a) i. SL (assume nonMACRS SL method) ii. DB (200%) iii. GDS b) Using the GDS depreciation calculated in part a), convert your annual BTCFs to ATCFs. c) Using the ATCFs calculated in part b), calculate the PW of this purchase. s this a good investment?

Explanation / Answer

a) Calculation of Depn i)SLM Year Depn Book Value Cost 98000 0 98000 Less Salvage Value 8000 1 15000 83000 Net cost 90000 2 15000 68000 Life in years 6 3 15000 53000 Depn 15000 90000/6 4 15000 38000 5 15000 23000 6 15000 8000 ii) DB 200% Life in years 6 Year Depn Book Value % of 200 DB method 100*2/6 33.33% 0      98,000.0 1      32,666.7      65,333.3 2      21,777.8      43,555.6 3      14,518.5      29,037.0 4         9,679.0      19,358.0 5         6,452.7      12,905.3 6         4,301.8         8,603.6 iii) GDS Rate of Depn Year Depn Book Value 1 20.00% 0          98,000 2 32.00% 1          19,600          78,400 3 19.20% 2          31,360          47,040 4 11.52% 3          18,816          28,224 5 11.52% 4          11,290          16,934 6 5.76% 5          11,290            5,645 6            5,645                   -   b) Year 0 1 2 3 4 5 6 NPW Initial outflow        -98,000           4,800 BTCF          20,000          20,000          20,000          20,000          20,000        20,000 Depn        -19,600        -31,360        -18,816        -11,290        -11,290         -5,645 EBT                400        -11,360            1,184            8,710            8,710        14,355 Tax at 40%                160           -4,544                474            3,484            3,484           5,742 PAT                240           -6,816                710            5,226            5,226           8,613 Depn          19,600          31,360          18,816          11,290          11,290           5,645 ATCF          19,840          24,544          19,526          16,516          16,516        14,258 FCF        -98,000          19,840          24,544          19,526          16,516          16,516        19,058 Disc Fact 1 0.94339623 0.88999644 0.83961928 0.79209366 0.74725817 0.7049605 Disc. ATCF        -98,000          18,717          21,844          16,395          13,082          12,342        13,435       -2,185 Since NPW

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