PROBLEM 3 70 POINTS The Trim Company is currently evaluating the purchase of commecial wind turbines that will replace the existing energy system. the wind turbines are purchased they will be acquired on January 2, 2018 for $360,000 with 6 year useful life anda $10,000 terminal disposal value. Assume the wind turbines qualty for the the 30% renewable energy credit. sume 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 a7 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. BOOK VALUE DOB Deprec, Income BOOK VALUE Tax Deduction END OF YEAR 55,575 139.425 99,883 28.5% 28.5% 28.5% 28.5%- 28.5% 28.5% " 28.5%- 195,000 139,425 17 18 19 20 21 39,736 Management has provided you with the income before income tax to be generated on the existing and new energy systems through 2023. Present Energy Energy 2018-2023 Annual Sales Labor Cost Operating cost Excluding depreciation Income Before Income Tax $ 200,000 200,000 55,000 s 20,000 30,000 $ 85,000 10,000 $ 30,000 115,000 s 170,000 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 investment net of income taxes. 10% rate of return on the 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 computations in good form. (Should the new machine be purchased? Why or why not?) your 2. What is the Internal Rate of Return if the new energy system is purchased? (For Problem 3, submit on the Final Project template on the blackboard. For this problem only you will be graded not only on the result but on your ability to to generate the formulas necessary to complete the problem like we did in class room demonstrations. PROBLEM 3 70 POINTS The Trim Company is currently evaluating the purchase of commecial wind turbines that will replace the existing energy system. the wind turbines are purchased they will be acquired on January 2, 2018 for $360,000 with 6 year useful life anda $10,000 terminal disposal value. Assume the wind turbines qualty for the the 30% renewable energy credit. sume 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 a7 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. BOOK VALUE DOB Deprec, Income BOOK VALUE Tax Deduction END OF YEAR 55,575 139.425 99,883 28.5% 28.5% 28.5% 28.5%- 28.5% 28.5% " 28.5%- 195,000 139,425 17 18 19 20 21 39,736 Management has provided you with the income before income tax to be generated on the existing and new energy systems through 2023. Present Energy Energy 2018-2023 Annual Sales Labor Cost Operating cost Excluding depreciation Income Before Income Tax $ 200,000 200,000 55,000 s 20,000 30,000 $ 85,000 10,000 $ 30,000 115,000 s 170,000 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 investment net of income taxes. 10% rate of return on the 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 computations in good form. (Should the new machine be purchased? Why or why not?) your 2. What is the Internal Rate of Return if the new energy system is purchased? (For Problem 3, submit on the Final Project template on the blackboard. For this problem only you will be graded not only on the result but on your ability to to generate the formulas necessary to complete the problem like we did in class room demonstrations