Do all the problems. Include calculations and/or explanations in your answers wh

Question

Do all the problems. Include calculations and/or explanations in your answers wherever appropriate. More credit will be given for correct reasoning than for correct arithmetic.

We are thinking of buying a truck. It will cost $20,000 and be subject to a 10% investment tax credit. It falls in the SACRS (30%, 20%, 20%, 15%, 15%) class. Our tax rate is 30%.

    (a)    Write the depreciation schedule.          

     (b)    We will sell the truck after four years for $5,000. What after-tax cash flow will result from the sale?

(c)   The truck will save us $6,000 per year in expenses. Write all the cash flows for this project from purchase to sale.

Explanation / Answer

Answer for subpoint a):

Answer for subpoint b):

Written down value of the asset after 4 years = $8092

Truck is sold for $5,000 .

Loss on sale of truck =$8,092 - $5,000 =$3,092

Tax savings on account of loss on sale of truck = $3092 * 30% = $927.60

After tax cash flow on sale of the truck = sale price of the truck + tax savings on account of sale of the asset at loss -Tax credit taken back as the asset is sold before the useful life of the asset.

=$5,000 +$927.60 - ($20,000* 10%)

=$5,000 +$927.60 - $2,000

=$3927.60

Answer for subpoint 3:

Cash flows from year 1 to Year 4 is as under:

As the first year investment tax credit is not considered i.e.., $20,000 * 10% =$2,000

Revised cash flows in year 1 = cash flows as computed for year 1 in above table + Tax credit on investment.

=$6,000 +$2,000 =$8,000.

Cash flows for the project from purchase to sale:

Cash flows on sale of asset is computed in subpart b of the question.

Year Opening balance (A) % of the depreciation (B) Depreciation for the year C = (A*B) Writen down value of the asset at the clost of the year (A-C) 0 $               20,000.00 1 $               20,000.00 30.00% $            6,000.00 $                     14,000.00 2 $               14,000.00 20.00% $            2,800.00 $                     11,200.00 3 $               11,200.00 15.00% $            1,680.00 $                       9,520.00 4 $                 9,520.00 15.00% $            1,428.00 $                       8,092.00 5 $                 8,092.00 30.00% $            2,427.60 $                       5,664.40

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