Deck 7: Depreciation and Income Taxes

Question 1

A nuclear power plant is planning to replace the outdated equipment with more environmental- friendly equipment. The new equipment has an initial cost of $410,000. The equipment is expected to yield an annual savings of $190,000 each year for the first 4 years and $191,200 each year thereafter. The MACRS with a 15- year recovery period is to be used for tax purposes. Should the equipment be purchased if the equipment will be sold for $148,263.00 at the end of year 10? Assume an effective tax of 38% and a before- tax MARR of 16.13% per year.

Answer 1

PW = $432,628.96
PW 10%) > 0; therefore, the equipment should be purchased.

Question 2

An inspecting and profiling web controller that costs $40,000 has a life of 8 years with a
$5000 salvage value. The estimated annual operating and maintenance cost is $3700 per year. Use classical straight line depreciation to determine the annual depreciation at the end of year 5.

Answer 2

d5 = $4375.00

Question 3

New spray coating equipment costs $24,000 is to be used in an oversea shipyard. It has a 12- year life and an estimated salvage value of $4750. If the global naval shipbuilding company uses MACRS with an ADS recovery period to calculate the depreciation and book value for the new coating equipment, determine the annual depreciation and book value at the end of year 7.

Answer 3

d7 = $2000.00
BV7 = $11,000.00

Question 4

An engineer- to- order manufacturer is considering purchasing new equipment for its film adhesive assembly. The initial cost of the equipment is $12,100 and annual maintenance costs are estimated to be $185,000 per year. Annual operating costs will be in direct proportion to the hours of use at $12 per hour. The expected annual revenue is $220,000 per year. The equipment has a salvage value of $500 at the end of 5 years. What is the maximum annual hours of use for which the equipment is economically justified? Use straight- line depreciation, an effective tax rate of 39%, and an after- tax MARR of 16% per year.

Question 5

A private metropolitan mass transit system operator wants to add a new trolleybus to its fleet. The following information is prepared for the economic evaluation. Either trolley is to be used for 8 years and sold for the estimated salvage value. The before- tax MARR is 12.31% per year and the effective tax rate is 35%. Using SL depreciation, select a machine on the basis of after- tax annual worth analysis.

Question 6

A piece of liquid handling equipment that costs $10,000 has a $3000 salvage value. Using MACRS depreciation with a 3- year recovery period, calculate the accumulated annual depreciation at the end of year 3.

Question 7

A viscosity sensing instrument costs $46,000 and has a $5500 salvage value with a 7- year recovery period. The estimated annual operating cost is $3000 per year. Use classical straight line depreciation to calculate the cumulative depreciation and a book value at the end of year 6.

Question 8

A coil winding and unwinding machine that costs $32,000 has a life of 9 years with a $4000 salvage value. Use classical straight line depreciation to determine the book value after 7 years.

Question 9

ADD Systems Corp. reported a gross income of $590,000, and depreciation and expenses total $225,000 for the year. If the state income tax is 6% per year, determine the average federal tax rate and overall effective tax rate.

Question 10

A plantation has purchased an automated propagation system for $26,000. The declining balance depreciation at a rate of 2 times the straight line rate and a $2022 salvage value are used to write off the capital investment. The company expects to realize net revenue of
$8000 each year for the next 5 years. Assume an effective federal tax of 39%, state income tax of 12.25% per year, and an after- tax MARR of 4% per year. Calculate the present worth of this investment.

Question 11

A $22,000 flow measurement instrument was installed and depreciated for 9 years and was sold for $4500. If the double declining balance method of depreciation is used, determine the difference between the book value and the market value at the end of year 9.

Question 12

A construction company has an effective income tax rate of 39%. The company must purchase one of the following two cement mixers for its new project. The after- tax MARR is 10% per year. Select a cement mixer on the basis of after- tax present worth analysis using MACRS with a 5- year recovery period.

Question 13

A manufacturer of hardboard and fiber cement sidings and panels purchased new equipment for its new product line for $20,000. A declining balance depreciation at a rate of 1.5 times the straight line rate with a 5- year recovery period and an estimated salvage value of $8000 was used to write off the capital investment. The company expects to realize net revenue of $57,000 each year for the next 5 years. However, due to the sudden change in business direction, the company decided to sell the equipment after 2 years of operation for $21,000. Assuming an effective tax of 40% and an after- tax MARR of 12% per year, calculate the future worth of the after- tax cash flow at the end of year 2.

Question 14

A laboratory centrifuge costs $79,000 and has a $5530 salvage value with an 8- year recovery period. The estimated annual operating cost is $7000 per year. Use the double declining balance method with switch over to straight line to tabulate the depreciation schedule at the end of each year.

Question 15

A Caribbean cruise line has purchased a new cruise ship for $670,000 and expects to realize a net revenue of $190,000.00 each year for the next 10 years. The estimated salvage value of the ship at the end of its useful life of 10 years is $52,000. Assume an effective federal tax of 40%, state income tax of 10.75% per year, and an after- tax MARR of 14% per year. Calculate the present worth of ATCF if a straight- line depreciation method is used.

Question 16

A petroleum refining and recovery service company, Cowboy Enterprises, purchased
$13,000 worth of equipment for reconditioning fuels in its storage tanks. The equipment has a functional life of 14 years and a salvage value of 5% of the purchased price. Use MACRS depreciation with a 10- year recovery period to determine the book value after 4 years.

Question 17

A low- cost airline operating in South Africa is considering adding either Boeing 737- 400 or Boeing 737- 800 to its fleet. The following information is prepared for the economic evaluation. Either aircraft is to be used for 5 years and sold for the estimated salvage value. Assume the double declining balance is used for tax purposes in this country and the airline's before- tax MARR is 6.00% per year and the effective tax rate is 35%. Select a machine on the basis of after- tax present worth analysis.

Question 18

An piece of automated assembly equipment has an initial cost of $64,000 and generates net annual benefits of $150,000 per year. The equipment is expected to have zero salvage value at the end of its useful life of 5 years. Using straight- line depreciation, an after- tax MARR of 2%, a federal tax rate of 39%, and a state tax rate of 9%, determine if the investment in this equipment is economically justifiable on the basis of the present worth of the EVA estimates.

Question 19

Seminole Lighting, a specialty lamps and specialty light sources manufacturer, had the following information on its annual tax returns. Determine Seminole's taxable income and calculate the federal income tax for the year.

Question 20

Mountaineer Transportation, Inc. had the following information at the end of the year. For an effective federal tax of 38% and state income tax of 7.5% per year, determine the company's BTCF, ATCF, and NOPAT for the year.

Question 21

A construction company has an effective income tax rate of 38%. The company must purchase one of the following two models of tower cranes for its new project. The
after- tax MARR is 12% per year. Select a crane on the basis of present worth of the EVA estimates using MACRS with a 5- year recovery period.

Question 22

A machine used in the manufacture of fabricated metal products at Crimson Tide Inc., with a useful life of 12 years, is to be depreciated by the MACRS method for tax depreciation purposes. The machine has a first cost of $23,000 with a $3000 salvage value. The company's controller wants to understand the effects of the difference in the annual depreciation charge for SL and MACRS with GDS recovery period. Using a half- year convention for both methods, determine the differences in the book value if the machine is sold at the end of year 5.

Question 23

An uninterruptible power system used in a small production facility at Acme Manufacturing has a basis of $56,000 and is expected to have $5750 salvage value after 125,000 hours of use. Calculate the depreciation rate per hour of use and the book value after 77,000 hours of operation.

Question 24

A logistics company is deciding between two models of semi- trailer trucks to add to its fleet. The manager has prepared the following information for the economic evaluation. The new trucks are to be used for 7 years and sold for the estimated salvage value. The before- tax MARR is 16.39% per year and the effective tax rate is 39%. Select a machine on the basis of after- tax annual worth analysis using MACRS with a 5- year recovery period.

Question 25

Aggie Research Laboratory purchased a new High Performance Liquid Chromatography HPLC) unit for $39,000. The unit has a functional life of 5 years and a salvage value of 10% of the purchased price. Using declining balance depreciation at a rate of 1.5 times the straight line rate, determine the annual depreciation at the end of year 2.

Question 26

Bulldog Shipping, Inc. has purchased new cargo containers for $500,000. MACRS with a
5- year recovery period and an estimated salvage value of $96,000 is to be used to write off the capital investment. The company expects to realize net revenue of $170,000 each year for the next 6 years. Assume an effective federal tax of 38%, state income tax of 10.5% per year, and an after- tax MARR of 13% per year. Calculate the present worth of this investment.

Question 27

For depreciation purposes, a 150% declining balance depreciation is used for a material handling lift truck with a cost basis of $23,000 and a salvage value of $6250 at the end of its useful life of 5 years. If the MACRS depreciation method with a 3- year recovery period is used for tax purposes, determine the difference between the annual depreciation after 2 years calculated from both depreciation methods.