16. (20 pts. total) A large, profitable corporation with net income exceed $20 m

Question

16. (20 pts. total) A large, profitable corporation with net income exceed $20 million is considering the purchase of a ished plastic products. This tool costs $100,000 with the expected salvage from this tool and write off. new special tools for the manufacture of fin value of 0 plans to dispose it at the end of year 4. The company elects MACRS depreciation method to accelerate tax we a) Determine the after cash flow for this investment by completing the table below (15 pts) after 4 years of useful life. The company expects the net income of $38,000 per year Income Tax After Tax | @35% (ATCF) Before-Tax MACRS YRI Cash Flow | Depreciation! Income Income (BTCF) (Dt) (TI) 0 (5 pts) According to the tax rules regarding the disposal of a depreciated asset, if the market value is higher than the book value at the time of disposal, then the excess depreciation will be recaptured as taxable income and taxed as ordinary gain. On the other hand if the book value is higher than the market value, there is a loss on disposal and it is deducted from the taxable income. If the tool is sold for $20,000 in year 4, determine the cash flow after tax for year 4. (a)

Explanation / Answer

Year BTCF Depn TI Income Tax 35% ATCF 0         (1,00,000) (1,00,000.00) 1               38,000              33,330         4,670     1,634.50         36,365.50 2               38,000              44,450      (6,450) -2,257.50         40,257.50 3               38,000              14,810      23,190     8,116.50         29,883.50 4               38,000                7,410      30,590 10,706.50         27,293.50 Working Note: Year 3-year Depreciation                 1                 33.33              33,330                 2                 44.45              44,450                 3                 14.81              14,810                 4                    7.41                7,410 Total          1,00,000 If tool Sold for 20000 in year 4 then cash flow is Year BTCF Depn TI Income Tax 35% ATCF 0         (1,00,000) (1,00,000.00) 1               38,000              33,330         4,670     1,634.50         36,365.50 2               38,000              44,450      (6,450) -2,257.50         40,257.50 3               38,000              14,810      23,190     8,116.50         29,883.50 4               58,000                7,410      50,590 17,706.50         40,293.50

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