Problem 24-3A Computation of cash flows and net present values with alternative

Question

Problem 24-3A Computation of cash flows and net present values with alternative depreciation methods LO P3 The following information applies to the questions displayed below. Manning Corporation is considering a new project requiring a $90,000 investment.in test equipment with no salvage value. The project would produce $75,000 of pretax income before depreciation at the end of each of the next six years. The company's income tax rate is 34%. In compiling its tax return and computing its ncome tax payments, the company can choose between the two alternative depreciation schedules shown n the table. (FV of $1, PV of $1, FVA of $1 and PVA of $t (Use MACRS) (Use appropriate factor(s) from the tables provided.) Straight-Line MACRS reclation reciation Year 1 $ 9,000 $18,000 Year 2 18,000 18,000 8,000 8,000 ,000 Year 3 Year 4 Year 5 Year 6 28,800 7,280 0,368 0,368 5184 Totals $90,000 $90,000

Explanation / Answer

Req1 Year Income Before Ddep SLM Dep Taxable income Income Tax Net Cash flows 1 75000 9000 66000 22440 52560 2 75000 18000 57000 19380 55620 3 75000 18000 57000 19380 55620 4 75000 18000 57000 19380 55620 5 75000 18000 57000 19380 55620 6 75000 9000 66000 22440 52560 Req 2: Year Income Before Ddep MACRS Dep Taxable income Income Tax Net Cash flows 1 75000 18000 57000 19380 55620 2 75000 28800 46200 15708 59292 3 75000 17280 57720 19624.8 55375.2 4 75000 10368 64632 21974.88 53025.12 5 75000 10368 64632 21974.88 53025.12 6 75000 5184 69816 23737.44 51262.56 Req 3: NPV using SLM I = 10% Year Net cash flows PV Factor       = Present values 1 52560 0.909091 47781.82 2 55620 0.826446 45966.94 3 55620 0.751315 41788.13 4 55620 0.683013 37989.21 5 55620 0.620921 34535.64 6 52560 0.564474 29668.75 Total present value of cash iflows 237730 Less: Initial Investment 90000 Net Present values 147730 Req 4: NPV using MACRS I = 10% Year Net cash flows PV Factor       = Present values 1 55620 0.909091 50563.64 2 59292 0.826446 49001.65 3 55375.2 0.751315 41604.21 4 53025.12 0.683013 36216.87 5 53025.12 0.620921 32924.43 6 51262.56 0.564474 28936.38 Total present value of cash iflows 239247 Less: Initial Investment 90000 Net Present values 149247

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