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Solution Assignment 4 Chapter 7

This document calculates the net present value and economic value added of a 3-year asset using MACRS depreciation and a 12% minimum after-tax rate of return. It presents the before-tax cash flows, depreciation deductions, taxable income, and after-tax cash flows for each year. It then calculates the present value of the after-tax cash flows to determine the net present value is $10,533.82. It also calculates the net operating profit after tax, book value, and economic value added for each year to determine the annual equivalent economic value added is $3,467.73, matching the net present value.

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Huynh Ng Quynh Nhu
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© © All Rights Reserved
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36 views

Solution Assignment 4 Chapter 7

This document calculates the net present value and economic value added of a 3-year asset using MACRS depreciation and a 12% minimum after-tax rate of return. It presents the before-tax cash flows, depreciation deductions, taxable income, and after-tax cash flows for each year. It then calculates the present value of the after-tax cash flows to determine the net present value is $10,533.82. It also calculates the net operating profit after tax, book value, and economic value added for each year to determine the annual equivalent economic value added is $3,467.73, matching the net present value.

Uploaded by

Huynh Ng Quynh Nhu
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Basis = $145,000 = 125,000 +20,000

𝐵−𝑆𝑉
(a) d2 = 𝑁 𝑁 =($145,000 − $15,000)/10 = $13,000
(b) BV1 = 𝐵 − 𝑑1∗ =$145,000 − $13,000 = $132,000
∗
(c) BV10 = 𝐵 − 𝑑10 = $145,000 − $13,000(10) = $15,000

7.8

𝐚) 𝐒𝐋 𝐦𝐞𝐭𝐡𝐨𝐝:
B − SV $60,000 − $12,000
d3 = dk = = = $3,428.57
N 14
BV5 = B − d5∗ = $60,000 − 5 ∗ $3,428.57 = $42,857.15

𝐛) 𝟐𝟎𝟎% 𝐃𝐁 𝐦𝐞𝐭𝐡𝐨𝐝 𝐰𝐢𝐭𝐡 𝐬𝐰𝐢𝐭𝐜𝐡 − 𝐨𝐯𝐞𝐫 𝐭𝐨 𝐒𝐋:


We have the following table:

Beginning of Year BV Depreciation method Depreciation Amount (DA)


Year
(a) 200% DB method (b) SL method (c) (d)
1 $60,000.00 $8,571.43 $3,428.57 $8,571.43
2 $51,428.57 $7,346.94 $3,032.97 $7,346.94
3 $44,081.63 $6,297.38 $2,673.47 $6,297.38
4 $37,784.26 $5,397.75 $2,344.02 $5,397.75
5 $32,386.51 $4,626.64 $2,038.65 $4,626.64

(a) The entry for BVk (2 ≤ k ≤ 5) is calculated: BVk (2 ≤ k ≤ 5) = BVk−1 − DAk−1 .


200%
(b) The DB depreciation deduction is calculated: dk−DB = BVk ∗ R (= ) (1 ≤ k ≤ 5).
14
BVk −SV
(c) The SL depreciation deduction is calculated : dk−SL = (1 ≤ k ≤ 5).
14−k+1
(d) The DA is chosen by selecting the larger value between (b) and (c).

From the table, we can see: d3 = $6,297.38 and BV5 = $32,386.51 − $4,626.64 = $27,759.87

𝐜) 𝐆𝐃𝐒 𝐦𝐞𝐭𝐡𝐨𝐝:

Looking in Table 7-2, we can see the GDS recovery period is 7 years.
Table 7-2 gives: r1 = 0.1429, r2 = 0.2449, r3 = 0.1749, r4 = 0.1249, r5 = 0.0893
d3 = r3 ∗ B = 0.1749 ∗ $60,000 = $10,494
d∗5 = d1 + d2 + d3 + d4 + d5 = $60,000 ∗ (0.1429 + 0.2449 + 0.1749 + 0.1249 + 0.0893) = $46,614.
BV5 = B − d5∗ = $60,000 − $46,614 = $13,386

𝐝) 𝐀𝐃𝐒 𝐦𝐞𝐭𝐡𝐨𝐝:
Looking in Table 7-2, we can see the ADS recovery period is 14 years.
1 $60,000 $60,000
d1 = d15 = 2 ∗ = $2,142.86 & d3 = d2→14 = = $4,285.72
14 14
d∗5
= d1 + d2 + d3 + d4 + d5 = $2,142.86 + 4 ∗ $4,285.72 = $19,285.74
BV5 = B − d5∗ = $60,000 − $19,285.74 = $40,714.26

7-12

A general purpose truck has a GDS recovery period of five years, so MACRS depreciation in year
five is d5 = cost basic*recovery rate = B*R = $100,000(0.1152) = $11,520.
𝐵−𝑆𝑉𝑁
Straight-line depreciation in year five would be = = ($100,000 − $8,000)/8 = $11,500.
𝑁
=> The difference in depreciation amounts is $20 = $11,520 - $11,500
7.23

𝐴𝑓𝑡𝑒𝑟−𝑡𝑎𝑥 𝑀𝐴𝑅𝑅
a. Before Tax MARR ~ =0.15/(1-0.4) = 0.25
(1−𝑒𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒)

b.
c.
𝐵𝑉8 = $90,000 – $12,861 - $22,041 - $15,741 - $11,241 – 8,037 - $8,028 - $8,037 - $4,014 = 0
(or at the end of year 8, the asset is fully depreciated → 𝐵𝑉8 = 0)
Salvage value = $10,000
Thus, taxable income is 𝑀𝑉 − 𝐵𝑉8 = $10,000 – 0 = $10,000
d.
e. The project should be rejected because at 15% minimum accelerated rate of return the
present worth of the machine is less than zero.

a.
The equivalent annual cost of option (A) that is to pay $10,000 annually is $10,000
The equivalent annual cost of option (B) that is to pay $50,000 at the end of five years is
$50,000 (A/F, 15%, 5) = $50,000(0.1483) = $7,145
Hence, option (B) should be chosen because it is cheaper.
C2:
C3:

 Recommended B
b.
Option A
Year BTCF Taxable Income Income Tax ATCF
1-5 $10,000 $10,000 $4,000 $6,000

Hence, the equivalent annual uniform cost of option A is $6,000


Option B
Year BTCF Taxable Income Income Tax ATCF
1-4 0 0 0 0
5 $50,000 $50,000 $20,000 $30,000

The annual equivalent uniform cost of option B:


$30,000(A/F,15%,5)
= $30,000(0.1483)
=$4,449
Hence, option (B) should be chosen because it is cheaper.
C2:
C3:
C4:

c. There is no different selection before and after income taxes are taken into account

7.49
a. Using Spreadsheet, obtain the following results with study period = useful lives:

3-year 12%
MACRS AT MARR
7-49 SV 0 t 50%
Before-Tax Cash Flow Depreciation Deduction Taxable Cash Flow for After-Tax Cash
End of
(BTCF) (MACRS) Income Income Taxes Flow
Year
(1) (2)=𝒓𝒌 ∗ 𝑩 (3)=(1)-(2) (4)=-t*(3) (5)=(1)+(4)
0 $ (84,000.00) − − − $ (84,000.00)
1 $ 40,000.00 $ 27,997.20 $ 12,002.8 ($ 6001.4) $ 33,998.6
2 $ 40,000.00 $ 37,338.00 $ 2,662 ($ 1331) $ 38,669
3 $ 40,000.00 $ 12,440.40 $27,559.6 ($ 13779.8) $ 26,220.2
4 $ 40,000.00 $ 6,224.40 $ 33,775.6 ($ 16887.8) $23,112.2

𝑃
b. 𝑃𝑊(12%) = ∑4𝑖=1 𝐴𝑇𝐶𝐹𝑖 ∗ (𝐹 , 12%, 𝑖) = −84,000 + 33,998.6 ∗ (1.12)−1 + 38,669 ∗ (1.12)−2 +
26,220.2 ∗ (1.12)−3 + 23,112.2 ∗ (1.12)−4 = $10,533.82429
𝐴
→ 𝐴𝑊(12%) = 𝑃𝑊(12%) (𝑃 , 12%, 4) = 10,553.82429 ∗ 0.3292 = $3,467.73
c. 𝑁𝑂𝑃𝐴𝑇𝑘 = (𝐴𝑇𝐶𝐹𝑘 − 𝑑𝑘 )( 𝑜𝑟 = 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒𝑘 + 𝐶𝑎𝑠ℎ𝑓𝑙𝑜𝑤 𝑓𝑜𝑟 𝑖𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥𝑘 )
𝐵𝑉𝑘 = 𝐵 − 𝑑𝑘∗
𝐸𝑉𝐴𝑘 = 𝑁𝑂𝑃𝐴𝑇𝑘 − 12% ∗ 𝐵𝑉𝑘−1

𝐸𝑂𝑌𝑘 𝑁𝑂𝑃𝐴𝑇𝑘 𝐵𝑉𝑘−1 𝐸𝑉𝐴𝑘


1 6,001.4 84,000 -4,078.6
2 1,331 56,002.8 -5,389.34
3 13,779.8 18,664.8 11,540.02
4 16,887.8 6,224.4 16,140.87

𝐴𝑛𝑛𝑢𝑎𝑙 𝑒𝑞𝑢𝑖𝑣𝑎𝑙𝑒𝑛𝑡 𝐸𝑉𝐴 = [−4,078.6(𝑃/𝐹, 12%, 1) + (−5,389.34)(𝑃/𝐹, 12%, 2) + 11,540.02(𝑃/


𝐹, 12%, 3) + 16,140.87(𝑃/𝐹, 12%, 4)](𝐴/𝑃, 12%, 4) = $3,467.73

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