Respond to your classmate in the following post and answer two questions.

1-What suggestions do you have for the problem they had an issue with? Can you explain it to them? 2- Perhaps you had issues with the same problem? What helped you?

Q (1). Your firm is considering the purchase of a new piece of equipment for $225,000. The equipment will be straight-line depreciated over four years. The salvage value (final book value) is 10% of the purchase price. The equipment will increase the earnings before interest, tax, and depreciation by $75,000 for each of the 4 years the equipment is used. The tax rate is 21% and the required rate of return is 10%. What is the NPV and should the equipment be purchased?

1. Depreciation:

Straight-line depreciation over 4 years = ( Purchase Price Salvage Value ) / Life of Equipment

Salvage value = 10% of $225,000 = $22,500

Depreciation per year = \frac{($225,000 - $22,500)}{4} = $50,625

1. Cash Flows:

For each of the 4 years:

EBITD = $75,000

EBIT (Earnings before interest and tax) = $75,000 - $50,625 (depreciation) = $24,375

Tax on EBIT = 21% of $24,375 = $5,118.75

Net Income after tax = $24,375 - $5,118.75 = $19,256.25

Add back Depreciation (since it is a non-cash expense) to get cash flow = $19,256.25 + $50,625 = $69,881.25

1. NPV Calculation:

NPV= (Cash Flow / (1+Rate of Return)^t ) Initial Investment

Using the given rate of return of 10%:

NPV = \frac{69,881.25}{1.10} + \frac{69,881.25}{1.10^2} + \frac{69,881.25}{1.10^3} + \frac{69,881.25}{1.10^4} - $225,000

After calculating the above, the NPV is approximately $11,881.96.

So the correct answer will be the NPV is 11881.96. Yes, the equipment should be purchased.

Q (2). Determine the taxable income for a firm as described here. The firm recorded revenues of $45,000 and recaptured depreciation of $2,000 for the year just ended. During the year, the firm incurred cash expenses of $29,000 and depreciation expenses of $15,575.

The Taxable income is given by

Taxable income

Gross income ( Revenue) - minus operating expenses - Minus depreciation expense - Plus depreciation recapture - plus capital gains - minus capital losses

Therefore given that:

Revenue = $45,000

Recaptured depreciation = $ 2,000

Incurred cash expenses=$ 29,000

Depreciation expenses= $ 15,575.

Taxable income = Revenue (Incurred cash expenses + Depreciation expenses) + Recaptured depreciation

Taxable income = 45,000 - (29,000 +15,575) + 2,000

Taxable income = $ 2,425

The depreciation recaptured is the gain realized by the sale of depreciable capital property.