10. Jacobs Co. is considering buying several specialized tools at a cost of $5,000. The new tools will save the company $1,500 in manufacturing costs each year and are expected to last 4 years. Assume salvage is $0 and the tax rate is 34%. Jacobs Co. uses MACRS 200% Declining Balance method to compute depreciation for income tax purposes. The 200% Declining Balance depreciation rates are: 33.3% in year 1, 44.5% in year 2, 14.8% in year 3, and 7.4% in year 4. Using a minimum desired after-tax rate of return of 12%, the net present value of the tool purchase would be: (include the effects of taxes)

a. $124.69 b. ($625.76) c. ($437.95) d. $836.47

11. Refer to #10 above. Assume salvage is $1,000 and that Jacobs uses the straight-line method to compute depreciation for tax purposes. For tax purposes, these tools will be depreciated over a 3-year life under the assumption they were purchased mid-way through the first year and that residual value is $0 (Hint: use depreciation rates of 1/6 in year 1, 1/3 in year 2, 1/3 in year 3, and 1/6 in year 4). Using a minimum desired after-tax rate of return of 10%, the net present value of the tool purchase would be: (include the effects of taxes)

a. ($379.28) b. $986.34 c. ($66.22) d. $125.72