12.8

On January 1, 2018 Crane Company will acquire a new asset costs $300,000 and that anticipated to have a salvage value of $31,000 at the end of four years. The new asset that is qualifies as three-year property under the Modified Accelerated Cost Recovery System (MACRS) will replace an old asset that currently has a tax basis of $86,000 and that can be sold on this date for $66,000 (net of selling costs) will continue to generate the same operating revenues as the old asset ($280,000 per year) However, it is predicted that savings in cash operating costs will be experienced as follows: total of $100,000 in each of the first three years, and $97,000 in the fourth year. Crane is subject to a combined income tax rate, of 40% and rounds all computations to the hearest dollar. Crane's fiscal year coincides with the calendar year Assume that any gain or loss ffects the taxes paid at the end of the year in which the gain or loss occurs. The company uses th et present value (NPV) method to analyze projects using the factors and rates presented below based on a discount rate of 14%): Annuity 0.877 1.647 2.322 2.914 14% MACRS. 33% 45% 15% 7% / of $1 at 14% PV of $1 at Ye ll 2018 2019 2020 2021 0.877 0.769 e. 675 e. 592