Johnson Poducts is considering purchasing a new milling machine that costs $100,
ID: 2677530 • Letter: J
Question
Johnson Poducts is considering purchasing a new milling machine that costs $100,000. The machine's installation and shipping costs will total l$2,500. If accepted, the milling machine project will require an initial net working capital investment of $20,000. Johnson plans to depreciate the machine on a straight-line basis over a period of 8 years. About a year ago, Johnson paid $10,000 to a consulting firm to conduct a feasibility study of the new milling machine. Johnson's marginal tax rate is 40 percent.a. Calculate the project's net investment (NINV).
B. Calculate the annual straight-line depreciation for the project.
c. Calculate MACRS depreciation assuming this is a 7-year class asset (Appendix 9A).
Explanation / Answer
a. Project's net investment (NINV) =$100,000+$2,500 +$20,000= $122,500.00 b annual straight-line depreciation for the project =$100,000/8 = $12,500.00 c.Depreciation in 1st year =14.29%*$100,000= $14,290.00 Depreciation in 2nd year =24.49%*$100,000= $24,490.00 Depreciation in 3rd year =17.49%*$100,000= $17,490.00 Depreciation in 4th year =12.49%%*$100,000= $12,490.00 Depreciation in 5th year =8.93%*$100,000= $8,930.00 Depreciation in 6th year =8.92%*$100,000= $8,920.00 Depreciation in 7th year =8.93%*$100,000= $8,930.00 Depreciation in 8th year = 4.46%*$100,000= $4,460.00
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