A company makes a $900,000 investment in 5-year MACRS-GDS property. The maximum

Question

A company makes a $900,000 investment in 5-year MACRS-GDS property. The maximum allowable Section 179 expense deduction is taken. Before-tax cash flows are as shown below, including a $100,000 salvage value after 5 years. Using a 40% income tax rate and a 10% ATMARR, determine the ATPW of the investment. (10 pts) -$900,000 250,000 300,000 350,000 400,000 550,000 5. Given the data from Problem 4, if the company decides to lease the equipment by making 5 beginning-of-year lease payments of $200,000, with a 40% tax rate and a 10% ATMARR, determine the ATPW for the investment. (10 pts) In Problem 4, suppose $500,000 of the investment capital is obtained by borrowing. The loan is to be repaid with 4 equal annual payments, based on a fixed annual compound interest rate of 10%, and the first payment is made 2 years after receiving the $500,000. A 40% tax rate and a 10% ATMARR apply. Determine the ATPW for the investment. (10 pts) 7. In Problem 6, suppose the 4-year, $500,000 loan is to be repaid using Plan 2, not Plan 3, and suppose the equipment is sold for $350,000 after only 3 years of use, at which time the balance of the loan is paid off. Determine the ATPW for the investment. (10 pts)

Explanation / Answer

Lease payments = -200000

Tax savings = 40%*200000 = 80000

Net Cashflow = -200000+80000 = -120000

ATPW = -120000*(1 - (1+10%)-5) / 10%

   = -454894.41

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