eBook

Problem 9-07

A firm has earnings of $21,000 before interest, depreciation, and taxes. A new piece of equipment is installed at a cost of $11,000. The equipment will be depreciated over five years, and the firm pays 15 percent of its earnings in taxes. What are the earnings and cash flows for the firm in years 2 and 5, using the two methods of depreciation? Use Exhibit 9.4 to answer the questions. Round your answers to the nearest dollar.

					Modified Accelerated
	Straight-line				Cost Recovery
	Year 2		Year 5		Year 2		Year 5
Earnings before depreciation and taxes	$		$		$		$
Depreciation expense
Earnings after depreciation
Taxes (15% tax rate)
Net earnings	$		$		$		$
Cash flow	$		$		$		$

Percentage of Cost Depreciated Over: EXHIBIT 9.4 Depreciation Schedules under the Modified Accelerated Cost Recovery System Recovery Year 1 2 3 Years 33.00% 45.00 15.00 7.00 5 Years 20.00% 32.00 19.20 11.52 11.52 20 Years 3.79% 7.22 6.68 3 4 7 Years 14.28% 24.49 17.49 12.49 8.93 8.93 8.93 4.46 5 10 Years 10.00% 18.00 14.40 11.52 9.22 7.37 6.55 6.55 6.55 6.55 3.29 6 5.76 7 8 15 Years 5.00% 9.50 8.55 7.69 6.93 6.23 5.90 5.90 5.90 5.90 5.90 5.90 5.90 5.90 5.90 3.00 9 10 11 12 13 14 15 16 6.18 5.71 5.28 4.89 4.52 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 2.25 17 18 19 20 21