16. (20 pts, total) A large, profitable corporation with net income exceed S20 m
ID: 2786880 • Letter: 1
Question
16. (20 pts, total) A large, profitable corporation with net income exceed S20 million is considering the purchase of a salvage new special tools for the manufacture of finished plastic products. This tool costs $100,000 with the expected value of 0 after 4 years of useful life. The company expects the net income of $38,000 per year from th plans to dispose it at the end of year 4. The company elects MACRS deprecia tion method to accelerate tax write off. a) Determine the after cash flow for this investment by completing the table below (15 pts) Before-Tax MACRS Taxable YR Cash Flow Depreciation Income (TI) After Tax Income Tax Cash Flow @35% (BTCF) (Dt) (ATCF) (5 pts) According to the tax rules regarding the disposal of a depreciated asset, if the market value is higher than the book value at the time of disposal, then the excess depreciation will be recaptured as taxable income and taxed as ordinary gain. On the other hand if the book value is higher than the market value, there is a loss on disposal and it is deducted from the taxable income. If the tool is sold for $20,000 in year 4, determine the cash flow after tax for year 4 (a)Explanation / Answer
a.)
Calculation of Depreciation using MARCS Depreciation Method
D1 = Depreciation for Ist Year = .2344*1,00,000=23,440
D2 = Depreciation for 2nd Year = .2871*1,00,000=28,710
D3 = Depreciation for 3rd Year = .2015*1,00,000=20,150
D4 = Depreciation for 4th Year = .2015*1,00,000=20,150
* Rate of Depreciation taken by MARCS Table
Calculation of After Tax Cash Flow for the Investment (value in $)
Before Tax Cash Flow
(BTCF)
b.)
Book value of the Asset= $1,00,000 - $1,00,000(.2344+.2871+.2015+.2015)
Book value of the Asset= $7550
Calcution of After Tax Cash Flow for Year 4 from sale of Asset(in $)
Total Cash Flow for Year 4 = $11,602+$15,642.50=$27,244.50
YearBefore Tax Cash Flow
(BTCF)
MACRS Depreciation Taxable Income Income Tax After Tax Cash Flow 0 -100,000 1 38,000 23,440 14,560 5,096 9,464 2 38,000 28,710 9,290 3,252 6,038 3 38,000 20,150 17,850 6,248 11,602 4 38,000 20,150 17,850 6,248 11,602Related Questions
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