In: Accounting
Problem 24-3A Computation of cash flows and net present values with alternative depreciation methods LO P3 [The following information applies to the questions displayed below.] Manning Corporation is considering a new project requiring a $80,000 investment in test equipment with no salvage value. The project would produce $68,500 of pretax income before depreciation at the end of each of the next six years. The company’s income tax rate is 34%. In compiling its tax return and computing its income tax payments, the company can choose between the two alternative depreciation schedules shown in the table. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use MACRS) (Use appropriate factor(s) from the tables provided.) Straight-Line Depreciation MACRS Depreciation* Year 1 $ 8,000 $ 16,000 Year 2 16,000 25,600 Year 3 16,000 15,360 Year 4 16,000 9,216 Year 5 16,000 9,216 Year 6 8,000 4,608 Totals $ 80,000 $ 80,000 * The modified accelerated cost recovery system (MACRS) for depreciation is discussed in Chapter 8. Problem 24-3A Part 4 4. Compute the net present value of the investment if MACRS depreciation is used. Use 6% as the discount rate.
Calculation of Cashflows and Present Value under Straight Line Depreciation method
Year |
Pre-tax Cashflow |
Tax |
Depreciation Tax Sheild |
Post tax cashflows |
Present Value Factors @ 6% |
Present Value |
1 |
68,500.00 |
23,290.00 |
2,720.00 |
47,930.00 |
0.9434 |
45,216.98 |
2 |
68,500.00 |
23,290.00 |
5,440.00 |
50,650.00 |
0.8900 |
45,078.32 |
3 |
68,500.00 |
23,290.00 |
5,440.00 |
50,650.00 |
0.8396 |
42,526.72 |
4 |
68,500.00 |
23,290.00 |
5,440.00 |
50,650.00 |
0.7921 |
40,119.54 |
5 |
68,500.00 |
23,290.00 |
5,440.00 |
50,650.00 |
0.7473 |
37,848.63 |
6 |
68,500.00 |
23,290.00 |
2,720.00 |
47,930.00 |
0.7050 |
33,788.76 |
Total |
27,200.00 |
298,460.00 |
244,578.95 |
Net Present Value = Present Value of Cash Inflows - Initial investment
= $ 244,578 - $ 80,000 = $164,578
Calculation of Cashflows and Present Value under MACRS Depreciation method
Year |
Pre-tax Cashflow |
Tax |
Depreciation Tax Sheild |
Post tax cashflows |
Present Value Factors @ 6% |
Present Value |
1 |
68,500.00 |
23,290.00 |
5,440.00 |
50,650.00 |
0.9434 |
47,783.02 |
2 |
68,500.00 |
23,290.00 |
8,704.00 |
53,914.00 |
0.8900 |
47,983.27 |
3 |
68,500.00 |
23,290.00 |
5,222.40 |
50,432.40 |
0.8396 |
42,344.02 |
4 |
68,500.00 |
23,290.00 |
3,133.44 |
48,343.44 |
0.7921 |
38,292.53 |
5 |
68,500.00 |
23,290.00 |
3,133.44 |
48,343.44 |
0.7473 |
36,125.03 |
6 |
68,500.00 |
23,290.00 |
1,566.72 |
46,776.72 |
0.7050 |
32,975.74 |
Total |
27,200.00 |
298,460.00 |
245,503.61 |
Net Present Value = Present Value of Cash Inflows - Initial investment
= $ 245,503 - $ 80,000 = $165,503
Calculation of Depreciation tax shield under the two alternatives
Year |
Straight line Depreciation |
Depreciation Tax Shield @ 34% |
MACRS Depreciation |
Depreciation Tax Shield @34% |
1 |
8,000.00 |
2,720.00 |
16,000.00 |
5,440.00 |
2 |
16,000.00 |
5,440.00 |
25,600.00 |
8,704.00 |
3 |
16,000.00 |
5,440.00 |
15,360.00 |
5,222.40 |
4 |
16,000.00 |
5,440.00 |
9,216.00 |
3,133.44 |
5 |
16,000.00 |
5,440.00 |
9,216.00 |
3,133.44 |
6 |
8,000.00 |
2,720.00 |
4,608.00 |
1,566.72 |
Total |
80,000.00 |
27,200.00 |
80,000.00 |
27,200.00 |