Gounod Corporation is contemplating the purchase of a new $756,000 machine with
ID: 2547174 • Letter: G
Question
Gounod Corporation is contemplating the purchase of a new $756,000 machine with a useful life of seven years. Gounod will use the machine for six years, after which time it expects to sell the machine for $30,000. Gounod expects that the machine will be able to save $260,000 per year in operating costs over its six-year useful life. However, Gounod is not certain about the income tax rates that will be in effect during the six-year useful life of this machine and, consequently, is not sure which depreciation method it should use for the ciation in both the first and last years. Gounod's MARR is 15%. Required: holding period, determine the net present value this opportunity for both straight-line depreciation and sum-of-the-years' digits depreciation. Which is the better choice? b. Assuming that marginal combined (state and federal) income tax rates remain at 30% for the first present value this opportunity for both straight-line depreciation and sum-of-the-years' digits depre- ciation. Which is the better choice? Assuming that marginal combined (state and federal) income tax rates begin remain at 30% for the first three years and then decrease to 25% for the final three years of the holding period,determine the net present value this opportunity for both straight-line depreciation and sum-of-the-years' digits depreciation. Which is the better choice? c.Explanation / Answer
Answer a.
Straight Line Depreciation
Depreciation Expense per annum = $756,000 / 6 Years
Depreciation Expense per annum = $121,000
Cash Inflow per Annum:
Year Savings of Operating Costs + Salvage Cost Depreciation per annum Net Operating Income Tax @30% Net Income Cash Inflow
A B C = A- B D = C X 30% E = C - D F = D + E
1 260,000 126,000 134,000 40,200 93,800 219,800
2 260,000 126,000 134,000 40,200 93,800 219,800
3 260,000 126,000 134,000 40,200 93,800 219,800
4 260,000 126,000 134,000 40,200 93,800 219,800
5 260,000 126,000 134,000 40,200 93,800 219,800
6 290,000 126,000 164,000 49,200 114,800 240,800
Sum-of Years Digit Method
Depreciation per annum:
Year 1 = $756,000 X 6/21 = $216,000
Year 2 = $756,000 X 5/21 = $180,000
Year 3 = $756,000 X 4/21 = $144,000
Year 4 = $756,000 X 3/21 = $108,000
Year 5 = $756,000 X 2/21 = $72,000
Year 6 = $756,000 X 1/21 = $36,000
Cash Inflow per Annum:
Year Savings of Operating Costs Depreciation per annum Net Operating Income Tax @30% Net Income Cash Inflow
A B C = A- B D = C X 30% E = C - D F = D + E
1 260,000 216,000 44,000 13,200 30,800 246,800
2 260,000 180,000 80,000 24,000 56,000 236,000
3 260,000 144,000 116,000 34,800 81,200 225,200
4 260,000 108,000 152,000 45,600 106,400 214,400
5 260,000 72,000 188,000 56,400 131,600 203,600
6 290,000 36,000 254,000 76,200 177,800 213,800
Year 0 1 2 3 4 5 6
Straight Line
Cash Inflow (756,000) 219,800 219,800 219,800 219,800 219,800 290,000
PV Factor - 15% 1.00000 0.86957 0.75614 0.65752 0.57175 0.49718 0.43233
Present Value (756,000) 191,130 166,200 144,522 125,671 109,279 125,375
NPV 106,179
Sum-of-Years Digit Method
Cash Inflow (756,000) 246,800 236,000 225,200 214,400.00 203,600 213,800
PV Factor - 12% 1.00000 0.86957 0.75614 0.65752 0.57175 0.49718 0.43233
Present Value (756,000) 214,609 178,450 148,073 122,584 101,225 92,432
NPV 101,372
Option A is better choice.
Answer b.
Cash Inflow per Annum - Straight Line:
Year Savings of Operating Costs + Salvage Cost Depreciation per annum Net Operating Income Tax Net Income Cash Inflow
A B C = A- B D E = C - D F = D + E
1 260,000 126,000 134,000 40,200 93,800 219,800
2 260,000 126,000 134,000 40,200 93,800 219,800
3 260,000 126,000 134,000 40,200 93,800 219,800
4 260,000 126,000 134,000 53,600 80,400 206,400
5 260,000 126,000 134,000 53,600 80,400 206,400
6 290,000 126,000 164,000 65,600 98,400 224,400
Cash Inflow per Annum - Sum-Of-Year Digit Method :
Year Savings of Operating Costs Depreciation per annum Net Operating Income Tax Net Income Cash Inflow
A B C = A- B D E = C - D F = D + E
1 260,000 216,000 44,000 13,200 30,800 246,800
2 260,000 180,000 80,000 24,000 56,000 236,000
3 260,000 144,000 116,000 34,800 81,200 225,200
4 260,000 108,000 152,000 60,800 91,200 199,200
5 260,000 72,000 188,000 75,200 112,800 184,800
6 290,000 36,000 254,000 101,600 152,400 188,400
Year 0 1 2 3 4 5 6
Straight Line
Cash Inflow (756,000) 219,800 219,800 219,800 219,800 219,800 224,400
PV Factor - 15% 1.00000 0.86957 0.75614 0.65752 0.57175 0.49718 0.43233
Present Value (756,000) 191,130 166,200 144,522 125,671 109,279 97,014
NPV 77,818
Sum-of-Years Digit Method
Cash Inflow (756,000) 246,800 236,000 225,200 199,200.00 184,800 188,400
PV Factor - 12% 1.00000 0.86957 0.75614 0.65752 0.57175 0.49718 0.43233
Present Value (756,000) 214,609 178,450 148,073 113,893 91,878 81,451
NPV 72,353
Option A is better choice.
Answer c.
Cash Inflow per Annum - Straight Line:
Year Savings of Operating Costs + Salvage Cost Depreciation per annum Net Operating Income Tax Net Income Cash Inflow
A B C = A- B D E = C - D F = D + E
1 260,000 126,000 134,000 40,200 93,800 219,800
2 260,000 126,000 134,000 40,200 93,800 219,800
3 260,000 126,000 134,000 40,200 93,800 219,800
4 260,000 126,000 134,000 33,500 100,500 226,500
5 260,000 126,000 134,000 33,500 100,500 226,500
6 290,000 126,000 164,000 41,000 123,000 249,000
Cash Inflow per Annum - Sum-Of-Year Digit Method :
Year Savings of Operating Costs Depreciation per annum Net Operating Income Tax Net Income Cash Inflow
A B C = A- B D E = C - D F = D + E
1 260,000 216,000 44,000 13,200 30,800 246,800
2 260,000 180,000 80,000 24,000 56,000 236,000
3 260,000 144,000 116,000 34,800 81,200 225,200
4 260,000 108,000 152,000 38,000 114,000 222,000
5 260,000 72,000 188,000 47,000 141,000 213,000
6 290,000 36,000 254,000 63,500 190,500 226,500
Year 0 1 2 3 4 5 6
Straight Line
Cash Inflow (756,000) 219,800 219,800 219,800 219,800 219,800 249,000
PV Factor - 15% 1.00000 0.86957 0.75614 0.65752 0.57175 0.49718 0.43233
Present Value (756,000) 191,130 166,200 144,522 125,671 109,279 107,650
NPV 88,453
Sum-of-Years Digit Method
Cash Inflow (756,000) 246,800 236,000 225,200 222,000.00 213,000 226,500
PV Factor - 12% 1.00000 0.86957 0.75614 0.65752 0.57175 0.49718 0.43233
Present Value (756,000) 214,609 178,450 148,073 126,929 105,899 97,922
NPV 115,881
Option B is better choice.
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