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The Trim Company is currently evaluating the purchase of commecial wind turbines that will replace the existing energy system. If the wind turbines are purchased they will be acquired on January 2,2018 for $360,000 with a 6 year useful life and a $10,000 terminal disposal value. Assume the wind turbines qualfy for the the 30% renewable energy credit. Assume that Trim Company will depreciate the turbines over a 5 year useful life using double declining balance on its tax return with depreciation in the fifth year being the book value at the beginning of the fifth year. Salvage value is to be ignored when computing depreciation. Assume the present system was purchased for $195,000 on Jan. 2, 2016. The Trim Company is depreciating the system over a 7 year useful life using the double declining balance method on its tax return with depreciation in the seventh year being the book value at beginning of the seventh year. Salvage value has been correctly excluded from the computation of depreciation. Even though the useful life of the existing system for depreciation purposes is seven years management feels it will last eight years and have a terminal disposal value of $5,000. Below is a depreciation schedule to date. Management has provided you with the income before income tax to be generated on the existing and new energy systems through 2023. If the present energy system is sold today it will have a resale value of $40,000. In order for the new energy system to be purchased it will require a 10% rate of return on the investment net of income taxes. 1. Compute the net present value on the project net of income taxes assuming that the required rate of return on the project will be 10%. Assume the income tax rate is 40%. Show all of your computations in good form. (Should the new machine be purchased? Why or why not?). 2. What is the Internal Rate of Return if the new energy system is purchased? 1. TOTAL PRESENT A. RECURRING CASH OPERATING SAVINGS, VALUE AT B. DIFFERENCES IN TAX SAVINGS DUE TO DEPRECIATION TAX TAX RATE SAVINGS NET INITIAL INVEST. ON NEW MACHINE PURCHASE PRICE LESS: RESALE VALUE OF OLD MACHINE LESS: INCOME TAX SVGS GENERATED FROM SLE OF OLD MACHINE AT A LOSS RESALE VALUE LESS: BV OF MACH. LOSS OR GAIN TAX RATE TAX SAVINGS NET INITIAL INVESTMENT Present value of disposal value NET Disposal Price less: Book Value Gain or Loss on Sale Less: Tax Present value of disposal value Net Present Value of Keeping or Replacing The Trim Company is currently evaluating the purchase of commecial wind turbines that will replace the existing energy system. If the wind turbines are purchased they will be acquired on January 2,2018 for $360,000 with a 6 year useful life and a $10,000 terminal disposal value. Assume the wind turbines qualfy for the the 30% renewable energy credit. Assume that Trim Company will depreciate the turbines over a 5 year useful life using double declining balance on its tax return with depreciation in the fifth year being the book value at the beginning of the fifth year. Salvage value is to be ignored when computing depreciation. Assume the present system was purchased for $195,000 on Jan. 2, 2016. The Trim Company is depreciating the system over a 7 year useful life using the double declining balance method on its tax return with depreciation in the seventh year being the book value at beginning of the seventh year. Salvage value has been correctly excluded from the computation of depreciation. Even though the useful life of the existing system for depreciation purposes is seven years management feels it will last eight years and have a terminal disposal value of $5,000. Below is a depreciation schedule to date. Management has provided you with the income before income tax to be generated on the existing and new energy systems through 2023. If the present energy system is sold today it will have a resale value of $40,000. In order for the new energy system to be purchased it will require a 10% rate of return on the investment net of income taxes. 1. Compute the net present value on the project net of income taxes assuming that the required rate of return on the project will be 10%. Assume the income tax rate is 40%. Show all of your computations in good form. (Should the new machine be purchased? Why or why not?). 2. What is the Internal Rate of Return if the new energy system is purchased? 1. TOTAL PRESENT A. RECURRING CASH OPERATING SAVINGS, VALUE AT B. DIFFERENCES IN TAX SAVINGS DUE TO DEPRECIATION TAX TAX RATE SAVINGS NET INITIAL INVEST. ON NEW MACHINE PURCHASE PRICE LESS: RESALE VALUE OF OLD MACHINE LESS: INCOME TAX SVGS GENERATED FROM SLE OF OLD MACHINE AT A LOSS RESALE VALUE LESS: BV OF MACH. LOSS OR GAIN TAX RATE TAX SAVINGS NET INITIAL INVESTMENT Present value of disposal value NET Disposal Price less: Book Value Gain or Loss on Sale Less: Tax Present value of disposal value Net Present Value of Keeping or Replacing