can you solve this without using excel? thanks. NO EXCEL please. A firm purchase
ID: 2768718 • Letter: C
Question
can you solve this without using excel? thanks. NO EXCEL please.
A firm purchases a depreciable asset at year 0 at price $148, which it uses for operations during the asset's useful life of 6 years, and the asset is depreciated according to a double-declining balance depreciation. At the end of the year 6 the firm sells the asset at price $74; the operation profit for the year 6 is $13; the firm incomes are taxed at the 28% tax rate. Calculate the present value of year 6 cash flow (after-tax. including operations and sale), if inflation is 1.4% and real interest rate is 4%. (Provide your answer with $0.1 precision.)Explanation / Answer
Depreciation as per double declining method:
End of year 6:
Sale price = 74
Les: Book balue = 12
Profit on sale = 62
Tax @28% = 17
Cash after tax (1) = 57
OPeration profit = 13
Less: Depreciation = 6
Profit before tax = 7
Profit after tax 7*(1-.28) = 5
Add: Depreciation = 6
Cash flow (2) = 11
Year 6 Cash flow (1)+(2) = 68
Discount rate = 5.4% (Nominal rate=REal rate+Inflation)
Discount factor =.73
Present value = 49
Thus, present value of year 6 cash flow is $ 49.
Cost at year 0 = 148 Useful life = 6 Years Annual Depreciation = 148/6 = 24.667 Rate of depreciation (SLM) = 17%Related Questions
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