A company purchases $6,000,000 of land that can be depreciated over a 39 year pe

Question

A company purchases $6,000,000 of land that can be depreciated over a 39 year period using straight line depreciation. Although the land will have some value at the end of 39 years, the company intends to depreciate the entire value since the land will not be sold has an annual net income of $550,000. The tax rate is 30%. Calculate the annual after tax net income with and without depreciation. Since this is straight line, the calculations only need to be done once for each case. A company has $980,000 of depreciable equipment. The annual net income is $610,00o. Compute the annual after tax net income using the MACRS GDS method with a 5 year recovery period. This has to be done for every year. Your company manufatures the gearing system used to close and retract an automobile sun roof. Each gearing system has a value of $1250. The company you supply requires 800 gearing systems per year. Because of the time required to review your inventory and the mechanism changes needed for minor changes on the gearing systems you provide to different customers, your set up cost per order is $600. Warehouse storage of undelivered gearing systems based on your desired rate of return and utilities is 0.15 of the value. Compute the best economic order quantity and the number of orders per year that would be best from your point of view Q = [(AU)(SU)(2)/(H)(PV))1/2

Explanation / Answer

1.

Annual straight line depreciation = value of the land / useful years = 6000000/39

Annual straight line depreciation = $153846.2

Annual after tax net income (with depreciation) = (Annual net income – annual depreciation)*(1-tax rate) + annual depreciation

Annual after tax net income (with depreciation) = (550000 -153846.2)*(1-30%) + 153846.2

Annual after tax net income (with depreciation) = $431153.9

Annual after tax net income (without depreciation) = (Annual net income)*(1-tax rate)

Annual after tax net income (without depreciation) = (550000)*(1-30%)

Annual after tax net income (without depreciation) = $385000

2.

Tax rate is taken as 30%.

MACRS property class is 5 years.

In year 1, Annual after tax net income = Annual net income – annual depreciation)*(1-tax rate) + annual depreciation

In year 1, Annual after tax net income = (610000 – 20%*980000)*(1-30%) + 20%*980000

In year 1, Annual after tax net income = $485800

In year 2, Annual after tax net income = (610000 - 32%*980000)*(1-30%) + 32%*980000

In year 2, Annual after tax net income = $521080

In year 3, Annual after tax net income = (610000 - 19.2%*980000)*(1-30%) + 19.2%*980000

In year 3, Annual after tax net income = $443448

In year 4, Annual after tax net income = (610000 - 11.52%*980000)*(1-30%) + 11.52%*980000

In year 4, Annual after tax net income = $460868.8

In year 5, Annual after tax net income = (610000 - 11.52%*980000)*(1-30%) + 11.52%*980000

In year 5, Annual after tax net income =$460868.8

In year 6, Annual after tax net income = (610000 – 5.76%*980000)*(1-30%) + 5.76%*980000

In year 6, Annual after tax net income = $443934.4

3.

Economic order quantity = (2*annual demand*ordering cost/holding cost)^.5

Economic order quantity = (2*800*600/(.15*1250))^.5

Economic order quantity = 71.55 or 72 units

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