Daily Enterprises is purchasing a $9.9 million machine. It will cost $51,000 to transport and install the machine. The machine has a depreciable life of 5 years, is using straight-line depreciation, and will have no salvage value. The machine will generate incremental revenues of $3.7 million per year along with incremental costs of $1.15 million per year. Daily's marginal tax rate is 21%.You are forecasting incremental free cash flows for Daily Enterprises.

a. If Daily Enterprises decides to use MACRS instead of straight-line depreciation, how would the incremental free cash flows associated with the new machine change?

b. Under the TCJA of 2017, Daily Enterprises has the option to take 100% "Bonus" depreciation in the year in which the equipment is put into use. This means that in that year, it would take the full depreciation expense equivalent to the cost of buying the equipment. If Daily does so, which cash flows would increase and which would decrease? How does this compare to MACRS?

a. If Daily Enterprises decides to use MACRS instead of straight-line depreciation, how would the incremental free cash flows associated with the new machine change?

"The incremental cash flows would increase in years 0 and 1, as the accelerated depreciation schedule would give Daily Enterprises a higher tax shield during those two years. In years 2 through 5, the incremental free cash flows would be lower, since the depreciation expenses in these years are lower than 20%. Overall, the present value of the free cash flows would increase under a MACRS depreciation schedule."

Is the above statement true or false?

True

.(Select from the drop-down menu.)

b. Under the TCJA of 2017, Daily Enterprises has the option to take 100% "Bonus" depreciation in the year in which the equipment is put into use. This means that in that year, it would take the full depreciation expense equivalent to the cost of buying the equipment. If Daily does so, which cash flows would increase and which would decrease? How does this compare to MACRS?(Select all the choices that apply.)

A.

In the case of Daily Enterprises, we assume that it puts the machine into use immediately, as seen by the MACRS expense in year 0. Thus, Daily would take 100% of the depreciation expense in year 0 so that the entire cost of the equipment is deducted from taxes that year.

B.

With its taxes reduced, the incremental cash flow in year 0 is increased. With 100% of the depreciation expense used in year 0, Daily would have no incremental depreciation in years 1 through 6. However, by accelerating the entire tax deduction to year 0, the present value of the incremental free cash flows would increase under bonus depreciation.

C.

Compared to MACRS, the effect will be less dramatic, but similar. MACRS puts more than half of the depreciation in years 0 and 1 (20% + 19.20%), whereas bonus depreciation puts 100% in year 0. Thus, again the incremental free cash flow will be higher in year 0, but lower in years 1 through 5, and the present value of those cash flows will be greater.

D.

Compared to MACRS, the effect will be less dramatic, but similar. MACRS puts more than half of the depreciation in years 0 and 1 (20% + 32%), whereas bonus depreciation puts 100% in year 0. Thus, again the incremental free cash flow will be higher in year 0, but lower in years 1 through 5, and the present value of those cash flows will be greater.

Click to select your answer

Daily Epsis purchasing a 99 min machine will cost 551000 oransport and in the machineThe machine has a depreciate yang betine depreciation and we were the machine wire of 537 million per year along with increment of 1.15.on per year Daigaltate 1 You are forcing cash or Dalys Daily Editos MACRS instead of straight-line depreciation how would the increased with the machine b. Under the CM 2017 Daily Enterprise has the option to take 100% reciton year in which the equipment is pose Themes that in that you would the recipe the cabing the Daly does to which can would increase and which would does this conges MACRST The incremental cash flow would increase years and as the weed depreciation would give her a solid during the way tough the would be the depreciation one in these years are we than 20% Over the recent value of the cash for under MACRS derech is the store values True (5 to the drop-down me t. Under the CIA 2017 Daily has the option to take 100depiction in the year in which the equipment is put to this man that the depreciation to the cost of buying pentif Daly does so, which cash flow would increase and which would decrease? How do this compare to MACRS Select there that A the case of Daly Enterpris w metalit put the machine into use mmediately s by the MACRS in this Daly 0 of the depreciation that there cost of the side om at your In White aduced the mental cash flow year is increased with 100% of the decation experimeter. Daly would have no incremental decision is the www.by accelerating the tax deduction to year, the preserve of the incrementale cash flows would consecin c. Compared to RS beated will be dramatic but MACRS put more at the depreciation in years and 1 20 1920) was bonus reconnus 100% naar Thus Inmid behow will be higher in year but lower in year through and the othecah wilber D. Compared to MASS, the electibles de bus MACRS puts more that of the depreciation years and 120 whereas brou depreciation put in thus the incrementare cash flow will be higher in your but lower in year 1 and present at the cash flows will be great Click to sched your