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 $100,000 investment in test equipment with no salvage value. The project would produce $72,000 of pretax income before depreciation at the end of each of the next six years. The company's income tax rate is 38%. In compiling its tax return and computing its income tax payments, the company can choose between the two alternative depreciation schedules shown in the table. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use MACRS) (Use appropriate factor(s) from the tables provided.) Straight-Line MACRS Year 2 Year 3 Year 4 20000 20000 20000 s 20000 32.000 19.200 11,520 10,000 5,760 Totels $100000 100.000

Explanation / Answer

Annual Cash inflows Year Income Dep Income before tax Tax @38% Income after tax Annual cash inflows 1 72000 10000 62000 23560 38440 48440 2 72000 20000 52000 19760 32240 52240 3 72000 20000 52000 19760 32240 52240 4 72000 20000 52000 19760 32240 52240 5 72000 20000 52000 19760 32240 52240 6 72000 10000 62000 23560 38440 48440 I = 12% Year Net Cash inflows   * PV factor Present Values 1 48440 0.892857 43250 2 52240 0.797194 41645.41 3 52240 0.71178 37183.4 4 52240 0.635518 33199.46 5 52240 0.567427 29642.38 6 48440 0.506631 24541.21 Present value of cash inflows 209,462 Less: Initial investment 100,000 Net present value 109,462

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