A toothpaste-manufacturing company, “Pearl White”, just bought a mixing machine
ID: 2445651 • Letter: A
Question
A toothpaste-manufacturing company, “Pearl White”, just bought a mixing machine for $400,000. Its service life is 5 years, at the end of which time it will be sold for $20,000. It depreciates by declining balance depreciation at 30% per year, both in the company books and in Revenue Canada’s asset class for machinery of this type. Having this machine will increase the company annual revenues by $150,000, and its annual operating costs are $50,000. To purchase the machine, the company had to take out a bank loan of $300,000, which they will pay back over the next three years. The bank charges them 10% interest on this loan. If the company’s after-tax MARR is 20% and it is taxed at t = 30%, find the present worth of the investment, including the tax effects of depreciation and interest.
Explanation / Answer
Solution:
(A). Stright Line Depreciation:
Depreciation = 4,00,000 - 20,000 / 5
= 76,000
(B). Declining Balance Depreciation:
Revenue Year Ending = 1,50,000
Add: Bank Loan = 3,00,000
= 4,50,000
Less: Tax and Interest = 1,20,000
Total Value = 3,30,000
Depreciation = Aset Value - Salvage Value / Life time of the Asset
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