Question

Some new equipment under consideration will cost $1,900,000 and will be used for 7 years. Net working capital will experience a one time increase of $510,000 if the equipment is purchased. The equipment is expected to generate annual revenues of $1,500,000 and annual costs of $480,000. The project falls under the seven-year MACRs class for tax purposes, the tax rate is 20 percent, and the cost of capital is 12 percent. The project's fixed assets can be sold for $456,000 at the end of the project's life.

1. What is the book value of the equipment at the end of the project's life? Round your answer to the nearest whole dollar.

   $84,740 = $1,900,000 × 0.0446

2. What are the taxes on the sale of the equipment at the end of the project's life? Be sure to indicate clearly if taxes are owed or if there is a tax benefit. Round your answer to the nearest whole dollar.

   -$74,252 = ($84,740 - $456,000) × 0.2

   These are taxes owed.

3. What is the net cash flow for Year 7? Round your answer to the nearest whole dollar.

   $1,500,000	Revenues
   -480,000	Operating Costs
   -169,670	Depreciation
   $850,330	Earnings Before Taxes
   -170,066	Taxes @ 20 percent
   $680,264	Earnings After Taxes
   +169,670	Add depreciation
   $849,934	Operating Cash Flow
   +456,000	Sale of Equipment
   -74,252	Tax on Sale of Equipment
   +510,000	Recover NWC
   $1,741,682	Net Cash Flow

   All I want is an explanation of how to find the depreciation in part C.

Answer 1

AS I ASKED BY YOU, I HAVE PROVIDED ALL ANSWERS. BASICALLY FOR DEPRECIATION, YOU HAVE TO REMEMBER TABLE WHICH PROVIDES RATES OF DEPRECIATION, THEN IT WILL BE EASIER FOR YOU. NEED ANY OTHER HELP, HAPPY TO HELP YOU.