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Smart Pets company is a dog training institute. They are now considering adding a new project that trains cats. Primary cash flow analysis indicate that
Smart Pets company is a dog training institute. They are now considering adding a new project that trains cats. Primary cash flow analysis indicate that the project will generate $200,000 in revenue and $84,500 in costs (naturally, excluding depreciation) per year. The ROR of this company is 5% and the company pays 10% income tax. To start that division, they need to purchase some special handling equipment worth $400,000. These devices are expected to function for four years and then retire with zero salvage value.
A. Is it a worthy investment, if the company follows straight line depreciation method?
B. Will the answer given in A change if the company follows MACRS depreciation method (MACRS will treat the equipment as 3-year property)?
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