Question

In: Accounting

  You wish to analyze the financial effects after taxation of purchasing a set of desks ,...

  1.   You wish to analyze the financial effects after taxation of purchasing a set of desks , chairs and file cabinets (office furniture).   The cost of the equipment is 10,000. It is to be depreciated using the government mandated MACRS schedule furnished with the tables in this exam. The new equipment is expected to generate 5000 dollars each year for the first three years and then 8000 per year for 20 years after that. The tax rate is 35%. The analysis will be considered to give a yearly specification of BEFORE TAX CASH FLOW, DEPRECTIATION, TAXABLE INCOME, TAXES and AFTER TAX CASH FLOW. The easiest display technique would be a spread sheet. Carry out the analysis for the first 8 years only. (Salvage value not needed).

Solutions

Expert Solution

As per MACRS schedule the useful life of the office furniture is 7 years.

To calculate the depreciation, Standard 7 years MACRS table is used.

Beginning book Value Dep Allowance Factor Depreciation Ending Book Value
10,000 0.1429 10,000*0.1429=1429 8571
8571 0.2449 10,000*0.2449=2449 6122
6122 0.1749 10,000*0.1749=1749 4373
4373 0.1249 10,000*0.1249=1249 3124
3124 0.0893 10,000*0.0893=893 2231
2231 0.0892 10,000*0.092=892 1339
1339 0.0893 10,000*0.0893=893 446
446 0.0446 10,000*0.0446=446 0

The Eight Years analysis is as below:-

Year 1 2 3 4 5 6 7 8
Before Tax Cash Flow 5000 5000 5000 8000 8000 8000 8000 8000
Depreciation 1429 2449 1749 1249 893 892 893 446
Taxable Income 3571 2551 3251 6751 7107 7108 7107 7554
Taxes 3571*0.35=1249.85 2551*0.35=892.85 3251*0.35=1137.85 6751*0.35=2362 7107*0.35=2487.45 7108*0.35=2487.8 7107*0.35=2487.45 7554*0.35=2643.9
After Tax Cash Flow 2321.15 1658.15 2113.15 4389 4619.55 4620.2 4619.55 4910.1

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