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EE - Assignment Chapter 7 Solution

This document provides calculations to analyze the after-tax cash flows of a project over 6 years using MACRS depreciation. It shows: (1) The before-tax and after-tax cash flows each year, as well as NPV at 12% MARR of -$12,567, indicating the project is not viable. (2) The after-tax IRR is calculated to be 5.603% using interpolation, which is lower than the 12% MARR, further indicating the project should be rejected. (3) In conclusion, the project is not a sound investment since both the NPV and IRR analyses show returns below the required thresholds.

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74 views

EE - Assignment Chapter 7 Solution

This document provides calculations to analyze the after-tax cash flows of a project over 6 years using MACRS depreciation. It shows: (1) The before-tax and after-tax cash flows each year, as well as NPV at 12% MARR of -$12,567, indicating the project is not viable. (2) The after-tax IRR is calculated to be 5.603% using interpolation, which is lower than the 12% MARR, further indicating the project should be rejected. (3) In conclusion, the project is not a sound investment since both the NPV and IRR analyses show returns below the required thresholds.

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Xuân Thành
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© © All Rights Reserved
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Basis = $145,000 = 125,000 +20,000

(a) d2 = ($145,000 − $15,000)/10 = $13,000


(b) BV1 = $145,000 − $13,000 = $132,000
(c) BV10 = $145,000 − $13,000(10) = $15,000

7.8

a ¿ SLmethod :
B−SV $ 60,000−$ 12,000
d 3=d k = = =$ 3,428.57
N 14
BV 5=B−d ¿5=$ 60,000−5∗$ 3,428.57=$ 42,857.15

b ¿ 200 % DB method withswitch−¿ ¿ SL :

We have the following table:


Beginning of Year BV Depreciation method Depreciation Amount (DA)
Year
(a) 200% DB method (b) SL method (c) (d)
1 $60,000.00 $8,571.43 $3,428.57 $8,571.43
2 $51,428.57 $7,346.94 $3,032.97 $7,346.94
3 $44,081.63 $6,297.38 $2,673.47 $6,297.38
4 $37,784.26 $5,397.75 $2,344.02 $5,397.75
5 $32,386.51 $4,626.64 $2,038.65 $4,626.64

(a) The entry for BV k (2≤ k ≤ 5) is calculated: BV k ( 2 ≤ k ≤5 )=B V k−1−¿ D A k−1.

(b) The DB depreciation deduction is calculated: d k− DB=B V k∗R ¿ (


200 %
14 )
( 1≤ k ≤ 5 ).
B V k −SV
(c) The SL depreciation deduction is calculated : d k− SL= ( 1≤ k ≤ 5 ).
14−k +1
(d) The DA is chosen by selecting the larger value between (b) and (c).

From the table, we can see: d 3=$ 6,297.38∧B V 5 =$ 32,386.51−$ 4,626.64=$ 27,759.87

c ¿ GDS method : Looking in Table 7-2, we can see the GDS recovery period is 7 years.
Table 7-2 gives: r 1=0.1429 ,r 2 =0.2449 ,r 3=0.1749 , r 4 =0.1249 ,r 5=0.0893
d 3=r 3∗B=0.1749∗$ 60,000=$ 10,494
d ¿5=d 1+ d 2+ d3 + d 4 +d 5=$ 60,000∗( 0.1429+0.2449+0.1749+ 0.1249+ 0.0893 )=$ 46,614 .
BV 5=B−d ¿5=$ 60,000−$ 46,614=$ 13,386

d ¿ ADS method : Looking in Table 7-2, we can see the ADS recovery period is 14 years.
1
∗$ 60,000 $ 60,000
2 & d 3=d 2→ 14= =$ 4,285.72
d 1=d15 = =$ 2,142.86 14
14
¿
d 5=d 1+ d 2+ d3 + d 4 +d 5=$ 2,142.86+ 4∗$ 4,285.72=$ 19,285.74
BV 5=B−d ¿5 =$ 60,000−$ 19,285.74 =$ 40,714.26
7-12

A general purpose truck has a GDS recovery period of five years, so MACRS depreciation in
year five is d5 = cost basic*recovery rate = B*R = $100,000(0.1152) = $11,520.
Straight-line depreciation in year five would be ($100,000 − $8,000)/8 = $11,500.
=> The difference in depreciation amounts is $20 = $11,520 - $11,500
7.23

a. Before Tax MARR ~ 0.15/(1-0.4) = 0.25


b.
c/ BVs= $90,000 – 8 [(90,000 -0)/8] = 0
Salvage value = $10,000
Thus, taxable income is $10,000

d/
e/The project should be rejected because at 15% minimum accelerated rate of return the present
worth of the machine is less than zero.

a.
The equivalent annual cost of option (A) that is to pay $10,000 annually is $10,000
The equivalent annual cost of option (B) that is to pay $50,000 at the end of five years is
$50,000 (A/F, 15%, 5) = $50,000(0.1483) = $7,145
Hence, option (B) should be chosen because it is cheaper.
a.
Option A
Year BTCF Taxable Income Income Tax ATCF
1-5 $10,000 $10,000 $4,000 $6,000
Hence, the equivalent annual uniform cost of option A is $6,000
Option B
Year BTCF Taxable Income Income Tax ATCF
1-4 0 0 0 0
5 $50,000 $50,000 $20,000 $30,000

The annual equivalent uniform cost of option B:


$30,000(A/F,9%,5)
= $30,000(0.1671)
=$5,013
Hence, option (B) should be chosen because it is cheaper.
c. There is no different selection before and after income taxes are taken into account

7.49

a) Using Spreadsheet, obtain the following results with study period = useful lives:

MACRS 3-year AT MARR 12%


7-49 SV 0 t 40%
Before-Tax Cash Flow Depreciation Deduction Taxable Cash Flow for After-Tax Cash
End of
(BTCF) (MACRS) Income Income Taxes Flow
Year
(1) (2) (3)=(1)-(2) (4)=-t*(3) (5)=(1)+(4)
0 $(84,000.00) −¿ −¿ −¿ $(84,000.00)
1 $ 18,000.00 $ 27,997.20 $( 9,997.20) $ 3,998.88 $ 21,998.88
2 $ 18,000.00 $ 37,338.00 $(19,338.00) $ 7,735.20 $ 25,735.20
3 $ 18,000.00 $ 12,440.40 $ 5,559.60 $(2,223.84) $ 15,776.16
4 $ 18,000.00 $ 6,224.40 $ 11,775.60 $( 4,710.24) $ 13,289.76
5 $ 18,000.00 $−¿ $ 18,000.00 $(7,200.00) $ 10,800.00
6 $ 18,000.00 $−¿ $ 18,000.00 $(7,200.00) $ 10,800.00
PW −$ 12,567.33
AW −$ 3,056.70

( PF , 12 % , i)=−84,000+21,998.88∗(1.12 )
6
PW (12 % )=∑ ATC F i∗
−1 −2 −3
+25,735.20∗( 1.12 ) +15,776.16∗( 1.12 ) + 13,28
i=1
b) After Tax IRR is found at PW = 0

( )
6
P
→ PW ( i % ) =0 → ∑ ATC F i∗ , i % , n =0
n=1 F
We have:
PW(5%) = $1,376.67
PW(6%) = -$885.44
→ 5 %<i<6 %
Using linear interpolation, we find that i = 5.603%

c) The project is now not a sound investment, since the PW returns a negative value, and IRR returns a rate
lower than the MARR as well.

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