An asset in the five-year MACRS property class costs $150,000 and has a zero est
ID: 2575266 • Letter: A
Question
An asset in the five-year MACRS property class costs $150,000 and has a zero estimated salvage value after six years of use. The asset will generate annual revenues of $320,000 and will require $80,000 in annual labor and $50,000 in annual material expenses. There are no other revenues and expenses. Assume a tax rate of 40%. Click the icon to view the MACRS depreciation schedules. Click the icon to view the interest factors for discrete compounding when i = 12% per year. (a) Compute the after-tax cash flows over the project life. Fill in the table below. (Round to two decimal places.)
Explanation / Answer
Year
Purchase Price
MACRS Depreciation Rate
Depreciation
1
$150,000
35.00%
$52,500.00
2
26.00%
$39,000.00
3
15.60%
$23,400.00
4
11.01%
$16,515.00
5
11.01%
$16,515.00
6
1.38%
$2,070.00
Year
1
2
3
4
5
6
Revenue
$ 320,000
$ 320,000
$ 320,000
$ 320,000
$ 320,000
$ 320,000
Less: Labor
$ 80,000
$ 80,000
$ 80,000
$ 80,000
$ 80,000
$ 80,000
Less: Material
$ 50,000
$ 50,000
$ 50,000
$ 50,000
$ 50,000
$ 50,000
Less: Depreciation
$ 52,500
$39,000
$ 23,400
$ 16,515
$ 16,515
$ 2,070
Before-tax cash flow
$ 137,500
$ 151,000
$166,600
$ 173,485
$ 173,485
$ 187,930
Less: Tax @ 40 %
$ 55,000
$ 60,400
$ 66,640
$ 69,394
$ 69,394
$ 75,172
Add: Depreciation
$ 52,500
$39,000
$ 23,400
$ 16,515
$16,515
$ 2,070
Total after-tax cash flow
$ 135,000
$ 129,600
$ 123,360
$120,606
$ 120,606
$ 114,828
Year
Purchase Price
MACRS Depreciation Rate
Depreciation
1
$150,000
35.00%
$52,500.00
2
26.00%
$39,000.00
3
15.60%
$23,400.00
4
11.01%
$16,515.00
5
11.01%
$16,515.00
6
1.38%
$2,070.00
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