Question

A company purchases a general purpose truck to make its deliveries.  It wishes to analyze the financial effects including taxes and depreciation.   Its initial cost is 100,000.  It generates 120,000  Before Tax Cash flow per year.  It is to be Depreciated Using Double Declining Balance.   The taxation rate is 40% including all state federal and local taxes. The effects will be analyzed for the first six years.  Show in a spread sheet  (or other reasonable display)  for each year:   The Before Tax Cash Flow ,  the yearly depreciation,  the resulting taxable income,  the taxes paid and the after tax cash flow.  Indicate the equations used and give some brief  narrative indicating intermediate steps.

Answer 1

The depreciation method that we have to use is Double Declining Balance. Here the truck has to be depreciated for 6 years. Price of Truck = $ 100,000

year	BV	Depreciation	BV EOY
0	100,000	-	100,000
1	100,000	100,000*(1/3) = 33,333.33	100,000-33,333.33 = 66,666.67
2	66,666.67	66,666.67/3 = 22,222.22	66,666.67 - 22,222.22 = 44,444.44
3	44,444.44	44,444.44/3 = 14,814.81	44,444.44 - 14,814.81 = 29.629.63
4	29.629.63	29.629.63 / 3 = 9,876.54	29.629.63 - 9,876.54 = 19,753.09
5	19,753.09	19,753.09 / 3 = 6,584.36	19,753.09 - 6,584.36 = 13,168.72
6	13,168.72	13,168.72 / 3 = 4,389.57	13,168.72 - 4,389.57 = 8,779.15

Now calculating the ATCF

Year	BTCF	Depreciation	Taxable Income	Tax	ATCF
0	-100,000	-	-	-	- 100,000
1	120,000	33,333.33	120,000 - 33,333.33 = 86,666.67	0.4 * 86,666.67 = 34.666.67	120,000 - 34,666.67 =85,333.33
2	120,000	22,222.22	120,000-22,222.22 = 97,777.78	0.4*97,777.78= 39,111.11	120,000 - 39,111.11 =80,888.89
3	120,000	14,814.81	120,000-14,814.81=105,185.19	0.4*105,185.19=42,074.07	120,000 - 42,074.07=77,925.93
4	120,000	9876.54	120,000-9876.54=110,123.46	0.4*110,123.46=44,049.38	120,000 - 44049.38=75,950.62
5	120,000	6584.36	120,000-6584.36 = 113,415.64	0.4*113,415.64 = 45,366.26	120,000-45366.26 = 74,633.74
5	120,000	4,389.57	120,000-4389.57=115,610.43	0.4*115,610.43=46,244.17	120,000 - 46244.17 =73,755.83

Note: ATCF = BTCF - Tax

Solved it using excel too kindly refer the attached screenshot of the same.

Please help me it mean a lot to me.