headquartered in 1. Imperial Chemical, Inc, an international chemical products c
ID: 2519361 • Letter: H
Question
headquartered in 1. Imperial Chemical, Inc, an international chemical products company he United Kingdom, purchased two identical systems used in the manufacture of synthetic fibers One system is located in the United States and the other in Italy. Each is estimated to generate additional annual cash flow before tax (CFBT) $65,000 (US dollars) for the next 6 years. The company's division in Italy is incorporated there and may not use MACRS for depreciation. The classical straight line method is the one approved for foreign corporations with systems incorporated in Italy. The US incorporated system uses MACRS, the same as any US-based corporation First Cost Salvage Value Total annual CFBT, S/yr Tax Rate, % Depreciation Method Recovery Period, yrs. Interest Rate, i, % -250,000 25,000 65,000 40 MACRS -250,000 25,000 65,000 40 SLD 12 12 Show the before tax cash flow diagram for each company. (10 points) Determine total taxes for each company. (25 points) Show the after tax cash flow diagram for each company. (15 points) Use AW analysis to determine which system is more economically attractive after taxes.Explanation / Answer
Year 10 6.555.94.461
57,152
Note Calculation of Depreciation Under MACRS method for United states Asset Value= Initial Payment in the Zero Year + All Instalments Paid Initial Instalment =250000 Instal ment Paid =65000 Total Instalments = 6 Asset Value=2,50,000+(65000*6) Asset Value=2,50,000+3,90,000=6,40,000 Depreciation Under MACRS Method When using MACRS, an asset does not have any salvage value. This is because the asset is always depreciated down to zero as the sum of the depreciation rates for each category always adds up to 100%. When calculating depreciation expense for MACRS, always use the original purchase price of the asset as the depreciable base for each period. Note that you depreciate each category for one year longer than its classification period. For example, depreciate an asset classified under 3-Year MACRS for 4 years. Then depreciate an asset classified under 5-Year MACRS for 6 years, and so on MACRS Depreciation Table Below is the table for Half-Year Convention MACRS for 3, 5, 7, 10, 15 depreciation schedules. Depreciation Rates (%) Year3-Year 5-Year 7-Year 10-Year Year 1 33.332014.291053.75 Year 2 44.453224.49189.57.219 Year 3 14.8119.217.4914.48.556.677 Year 4 7.4111.5212.4911.527.76.177 Year 5 11.528.939.226.935.713 Year 6 5.768.927.376.235.285 Year 7 8.936.555.94.888 Year 8 4.466.555.94.522 Year 9 6.565.914.462Year 10 6.555.94.461
Year Depreciation Rate Asset Value Depreciation Amount 1 33.33 6,40,000 2,13,312 2 44.45 6,40,000 2,84,480 3 14.81 6,40,000 94,784 4 7.41 6,40,000 47,424 5 11.52 6,40,000 73,728 6 5.76 6,40,000 36,864 7 8.93 6,40,00057,152
cash Flow of Each company before Taxes of USA Company S.No Year Cash Flow Before Tax (A) Tax Rate @ 40% (B) Tax Amount C=(A * B) CashFlow After Tax D= (A-C) Depreciaion E Total Cash Flows F= (D+E) 1 0 2,50,000.00 40% 100000.00 1,50,000.00 2,13,312.00 3,63,312.00 2 1 65,000.00 40% 26000.00 39,000.00 2,84,480.00 3,23,480.00 3 2 65,000.00 40% 26000.00 39,000.00 94,784.00 1,33,784.00 4 3 65,000.00 40% 26000.00 39,000.00 47,424.00 86,424.00 5 4 65,000.00 40% 26000.00 39,000.00 73,728.00 1,12,728.00 6 5 65,000.00 40% 26000.00 39,000.00 36,864.00 75,864.00 Total cash flows 10,95,592.00Related Questions
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