Answered step by step
Verified Expert Solution
Question
1 Approved Answer
MS, a corporation in the 21 percent marginal tax bracket, owns equipment that is fully depreciated. This old equipment is still operating and should continue
MS, a corporation in the 21 percent marginal tax bracket, owns equipment that is fully depreciated. This old equipment is still operating and should continue to do so for four years (years 0, 1, 2, and 3}. MG's chief nancial ofcer estimates that repair costs for the old equipment will be $1,300 in year 0, $1,400 in year 1, $1,500 in year 2, and $1,600 in year 3. At the end ofyear 3, the equipment will have no residual value. MG could junk the old equipment and buy new equipment for $5,000 cash. The new equipment will have a threeyear MACRS recovery period, should not require any repairs during years 0 through 3, and will have no residual value at the end of year 3. Assume MG cannot make a Section 179 election to expense the $5,000 cost of the new equipment. Use a 10 percent discount rate. Use Table ?2,A1:_:pendix A and Appendix 8. Required: a-'l. Calculate the NW of aftertax cost if MG keeps the old equipment. a-Z. Calculate the NW of aftertax cost if MG buys new equipment. a-3. Which option (keep old or buy new} minimizes MG's aftertax cost? b. Assume MS can make a Section 1?9 election to expense the entire $5,000 cost of the new equipment. Under this change in facts, which option (keep old or buy new) minimizes MG's aftertax cost":I Conwlerte this question by entering your answers in the hats below. Rqu ' Req A1 Req A2 ' Req A3 Calculate the NW of aftertax cost if MG keeps the old equipment. (Round intermediate computations and nal answers to the nearest whole dollar amount. Cash outows and Negative amount should be indicated by a minus Sign.) NW of afterta): cost Req AZ > Calculate the NPV of after-tax cost if MG buys new equipment. (Round intermediate computations and final answers to the nearest whole dollar amount. Cash outflows and Negative amount should be indicated by a minus sign. ) Cash Paid on Recovery Tax Savings Present Value at Deduction Net Cash Flow Purchase at 21% 10% Year 0 Year 1 Year 2 Year 3 NPV of after-tax cost
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started