Question

In: Finance

The Summit Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost...

The Summit Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $120,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years: Use Table 12-12. Year 1 $ 54,000 Year 2 66,000 Year 3 38,000 Year 4 29,000 The firm is in a 35 percent tax bracket and has a cost of capital of 12 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. a. Calculate the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

Solutions

Expert Solution

Time line 0 1 2 3 4
Cost of new machine -120000
=Initial Investment outlay -120000
3 years MACR rate 33.33% 44.45% 14.81% 7.41% 0.00%
Profits 54000 66000 38000 29000
-Depreciation =Cost of machine*MACR% -39996 -53340 -17772 -8892 0 =Salvage Value
=Pretax cash flows 14004 12660 20228 20108
-taxes =(Pretax cash flows)*(1-tax) 9102.6 8229 13148.2 13070.2
+Depreciation 39996 53340 17772 8892
=after tax operating cash flow 49098.6 61569 30920.2 21962.2
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 0
Total Cash flow for the period -120000 49098.6 61569 30920.2 21962.2
Discount factor= (1+discount rate)^corresponding period 1 1.12 1.2544 1.404928 1.5735194
Discounted CF= Cashflow/discount factor -120000 43838.036 49082.43 22008.388 13957.375
NPV= Sum of discounted CF= 8886.23

jeff jeffy answered 1 month ago
Next > < Previous

Related Solutions

The Summit Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost...
The Summit Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $180,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years: Use Table 12-12. Year 1 $ 96,000 Year 2 110,000 Year 3 48,000 Year 4 46,000 The firm is in a 35 percent tax bracket and has a cost of capital of 12 percent. Use Appendix B for an approximate answer but calculate...
A company purchases an asset that costs $46,000. This asset qualifies as three-year property under MACRS....
A company purchases an asset that costs $46,000. This asset qualifies as three-year property under MACRS. The company uses an after-tax discount rate of 12% and faces a 31% income tax rate. (Use Table 1, Table 2 and Exhibit 12.4.) 1. Demonstrate that the PV of the depreciation deductions, when the income tax rate is 31%, is $11,472. 2. Given an after-tax discount rate of 12%, what tax rate would be needed in order for the PV of the depreciation...
An investment of $600,000 is made in equipment that qualifies as 3-year equipment for MACRS-GDS depreciation....
An investment of $600,000 is made in equipment that qualifies as 3-year equipment for MACRS-GDS depreciation. The before-tax cash flows, measured in constant dollars, for the investment consist of a uniform annual series of $200,000 plus a $200,000 salvage value at the end of the 5-year planning horizon. A 40% tax rate and 3% inflation rate apply. The real ATMARR is 10% a. Determine the after-tax cash flows, in constant dollars, for each year. b. Determine the present worth for...
A. A fixed asset is classified as 5-year MACRS property and has an initial cost of...
A. A fixed asset is classified as 5-year MACRS property and has an initial cost of $41,000 What is the aftertax cash flow from the sale of this asset if the pre-tax salvage value at the end of year 3 is $17,500 and the tax rate is 34 percent? Year Five-Year Property Class 1 20.00 %           2 32.00            3 19.20           4 11.52            5 11.52 6 5.76 $15,439.38 $15,558.04 $15,564.72 $15,463.06 B. A firm has sales for the...
Three years ago, you purchased some 5-year MACRS equipment at a cost of $135,000. The MACRS...
Three years ago, you purchased some 5-year MACRS equipment at a cost of $135,000. The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. You sold the equipment today for $82,500. Which of these statements is correct if your tax rate is 23 percent and you ignore bonus depreciation? Multiple Choice The tax due on the sale is $10,032.60. The book value today is $40,478. The book...
An asset used in a 4-year project falls in the 5-year MACRS class (refer to MACRS...
An asset used in a 4-year project falls in the 5-year MACRS class (refer to MACRS table on page 277), for tax purposes. The asset has an acquisition cost of $16,517,578 and will be sold for $7,378,085 at the end of the project. If the tax rate is 0.28, what is the aftertax salvage value of the asset ?
An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for...
An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $12,240,000 and will be sold for $2,720,000 at the end of the project.    If the tax rate is 23 percent, what is the aftertax salvage value of the asset? Multiple Choice $2,580,867 $2,094,400 $2,859,133 $2,709,910 $2,451,823
An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for...
An asset used in a 4-year project falls in the 5-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $18,180,000 and will be sold for $4,040,000 at the end of the project.    Required: If the tax rate is 33 percent, what is the aftertax salvage value of the asset? Options $3,743,496 $2,706,800 $4,336,504 $3,930,671 $3,556,322
An asset used in a 4-year project falls in the 5-year MACRS class (refer to MACRS...
An asset used in a 4-year project falls in the 5-year MACRS class (refer to MACRS table on page 277), for tax purposes. The asset has an acquisition cost of $17341411 and will be sold for $7116692 at the end of the project. If the tax rate is 0.29, what is the aftertax salvage value of the asset (SVNOT)?
An asset with a first cost of $9000 is depreciated using 5-year MACRS recovery. The CFBT...
An asset with a first cost of $9000 is depreciated using 5-year MACRS recovery. The CFBT is estimated at $10,000 for the first 4 years and $5000 thereafter as long as the asset is retained. The effective tax rate is 40%, and money is worth 10% per year. In present worth dollars, how much of the cash flow generated by the asset over its recovery period is lost to taxes?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT