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

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).

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

ekkarill92 answered 3 years ago

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