A large, profitable corporation with net income exceed S20 million is considerin

Question

A large, profitable corporation with net income exceed S20 million is considering the installation of anew machine that cost $100,000 with the expected salvage value of $20,000 after 4 years of useful life a) Determine the depreciation "dt" and the book value "BV" for the first two years of depreciation methods in the table. Assume 3-yr property class for MACRS depreciation. b) The company expects the net income of $38,000 per year from this new machine and plans to dispose it for the salvage value at the end of year 4. If the straight line depreciation is elected by the company, complete the table below and determine the after cash tlow for this investment.

Explanation / Answer

Details Amt $ Cost Of Machine 100,000 Salvage value      20,000 Depreciable value      80,000 Useful life in years                4 SL depreciation per year      20,000 SL depreciation rate = 25% 150% DB rate on carrying value= 37.5% SOYD method depreciation of depreciable value Sum of years =1+2+3+4=              10 Depreciation rate 1st year =4/10= 40.00% Depreciation rate 2nd year =3/10= 30.00% MACRS SL SOYD 150% DB a Year Dep rate Dt BV dt BV Dep rate Dt BV Dep rate Dt BV Year 0 100,000     100,000     100,000    100,000 Year 1 33.33%     33,330     66,670       20,000        80,000 40%    32,000       68,000 37.5% 37,500      62,500 Year 2 44.45%     44,450     22,220       20,000        60,000 30%    24,000       44,000 37.5% 23,438      39,063 b ATCF Calculation Year Before Tax cash flow(BTCF) SL Depr (dt) Taxable income (TI) Income Tax (35% marginal rate) After Tax Cash flow (ATCF)=TI-Tax+dt                                                                             1      38,000     20,000     18,000         6,300        31,700                                                                             2      38,000     20,000     18,000         6,300        31,700                                                                             3      38,000     20,000     18,000         6,300        31,700                                                                             4      38,000     20,000     18,000         6,300        31,700

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