Manning Corporation is considering a new project requiring a $90,000 investment in test equipment with no salvage value. The project would produce $66,000 of pretax income before depreciation at the end of each of the next six years. The companys income tax rate is 40%. 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.

Straight-Line Depreciation MACRS Depreciation*

Year 1 . . . . . . . . . $ 9,000 $18,000

Year 2 . . . . . . . . . 18,000 28,800

Year 3 . . . . . . . . . 18,000 17,280

Year 4 . . . . . . . . . 18,000 10,368

Year 5 . . . . . . . . . 18,000 10,368

Year 6 . . . . . . . . . 9,000 5,184

Totals . . . . . . . . . $90,000 $90,000

Required 1. Prepare a five-column table that reports amounts (assuming use of straight-line depreciation) for each of the following for each of the six years: (a) pretax income before depreciation, (b) straight-line (c) taxable income, (d) income taxes, and (e) net cash flow. Net cash flow equals the amount of income before depreciation minus the income taxes.

2. Prepare a five-column table that reports amounts (assuming use of MACRS depreciation) for each of the following for each of the six years: (a) pretax income before depreciation, (b) MACRS depreciation expense, (c) taxable income, (d) income taxes, and (e) net cash flow. Net cash flow equals the income amount before depreciation minus the income taxes.

3. Compute the net present value of the investment if straight-line depreciation is used. Use 10% as the discount rate. Use the present value tables in Appendix D.

4. Compute the net present value of the investment if MACRS depreciation is used. Use 10% as the discount rate. Use the present value tables in Appendix D.