Question
Manning Corporation is considering a new project requiring a $100,000 investment in test equipment with no salvage value. The project would produce $73,000 of pretax
Manning Corporation is considering a new project requiring a $100,000 investment in test equipment with no salvage value. The project would produce $73,000 of pretax income before depreciation at the end of each of the next six years. The companys income tax rate is 36%. In compiling its tax return and computing its income tax payments, the company can choose between the two alternative depreciation schedules shown in the table. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use MACRS) (Use appropriate factor(s) from the tables provided.) |
Straight-Line Depreciation | MACRS Depreciation | |||||||
Year 1 | $ | 10,000 | $ | 20,000 | ||||
Year 2 | 20,000 | 32,000 | ||||||
Year 3 | 20,000 | 19,200 | ||||||
Year 4 | 20,000 | 11,520 | ||||||
Year 5 | 20,000 | 11,520 | ||||||
Year 6 | 10,000 | 5,760 | ||||||
Totals | $ | 100,000 | $ | 100,000 | ||||
Complete the following table assuming use of straight-line depreciation. Net cash flow equals the amount of income before depreciation minus the income taxes. | |
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Complete the following table assuming use of MACRS depreciation. Net cash flow equals the amount of income before depreciation minus the income taxes. | |
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Compute the net present value of the investment if straight-line depreciation is used. Use 10% as the discount rate.
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Compute the net present value of the investment if MACRS depreciation is used. Use 10% as the discount rate.
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