(a) Show before-tax cash flows (BTCF) for n=0 to n=4. (b) Calculate depreciation
ID: 2647428 • Letter: #
Question
(a) Show before-tax cash flows (BTCF) for n=0 to n=4.
(b) Calculate depreciation charges (use full-year charge for 4th year).
(c) Determine taxable incomes. Consider the depreciation recapture/loss or capital gain.
(d) Compute income taxes.
(e) Show after-tax cash flows (ATCF).
(f) Determine if the company obtained the expected after-tax rate of return.
Purchase Price of Laser Cutting Machine $400,000
Selling Price of Laser Cutting Machine $200,000
Annual Income on laser first 4 years $80,000
Contract length
4 Years with possible 4 year extension
No renewal on Contract after 4 years
MACRS depreciation as a 7 year property for taxes
Income taxes= 39%
After Tax Rate= 10% return
Purchase Price of Laser Cutting Machine $400,000
Selling Price of Laser Cutting Machine $200,000
Annual Income on laser first 4 years $80,000
Contract length
4 Years with possible 4 year extension
No renewal on Contract after 4 years
MACRS depreciation as a 7 year property for taxes
Income taxes= 39%
After Tax Rate= 10% return
Explanation / Answer
a) Show before-tax cash flows (BTCF) for n=0 to n=4
Here we assume machine selling prise are given at end of year 4,Hence total cash flow are $ 2,00,000 plus lease income cash flow $ 3,20,000 = $ 5,20,000
(b) Calculate depreciation charges (use full-year charge for 4th year)
Ans : $ 100000 ( Purchase price / 4 years)
(c) Determine taxable incomes. Consider the depreciation recapture/loss or capital gain.
Ans : 1) Net income at end of year 4 th = Lease income + Selling price - Depreciation yearly
$ 80000 + $ 200000- $100000= $180000
2) Net Loss for 1st year = Lease income 1st year - Depreciation for year - Purchase price
= $ 80,000- $ 1,00,000- $ 4,00,00
= Hence answer is = -$ 4,20,000 loss
(d) Compute Income taxes.
Ans : Income tax @ 39% per year $ 31,200
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