Question
The characteristics of the proposed purchase plan of a new piece of equipment are as following: Initial capital cost = HK$ 5000 Useful life =
The characteristics of the proposed purchase plan of a new piece of equipment are as following:
Initial capital cost = HK$ 5000
Useful life = 5 years
Salvage value = 0
Expected annual income = 6000 - 100 j (j = 1, 2, 3, 4, 5 years)
Expected annual disbursements = 950 + 50 j
(1)Tabulate the cash flows after tax if the effective tax rate is 20% and the straight line depreciation method is used.
(2) If the "Double-Declining-Balance Method" and the "Sum-of-Years'-Digits Method" are used for the calculation of the depreciation, please tabulate the cash flows before tax, the annual depreciation, the annual tax, and the cash flows after tax. And compare the accumulated depreciations in the end of the 5th year between these two methods.
Based on the above questions, please investigate and comment that how the "effective tax rate" and its variation will affect the results of the above questions. For example, the "effective tax rate" varies +/- 0~0.05 based on the original 0.20 (i.e. the effective tax rate varies in the range between 15%~25%). (* two-page report is required)
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