Cologne Corporation is considering a new project requiring a $25,000 investment in an asset having no salvage

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Cologne Corporation is considering a new project requiring a $25,000 investment in an asset having no salvage value. The project would produce $15,000 of pretax income before depreciation at the end of each of the next six years. The company€™s income tax rate is 30%. In compiling its tax return and computing its income tax payments, the company can choose between two alternative depreciation schedules as shown in the table.

Cologne Corporation is considering a new project requiring a $25

Required
1. Prepare a five-column table that reports amounts (assuming use of straight-line depreciation) for each of the following items for each of the six years:
(a) Pretax income before depreciation,
(b) Straight-line depreciation expense,
(c) Taxable income,
(d) Income taxes, and
(e) Net cash flow.
Net cash flow equals the amount of income before depreciation minus the income taxes. (Round answers to the nearest dollar.)
2. Prepare a five-column table that reports amounts (assuming use of MACRS depreciation) for each of the following items for each of the six years:
(a) Income before depreciation,
(b) MACRS depreciation expense,
(c) Taxable income,
(d) Income taxes, and
(e) Net cash flow.
Net cash flow equals the amount of income before depreciation minus the income taxes. (Round answers to the nearest dollar.)
3. Compute the net present value of the investment if straight-line depreciation is used. Use 15% as the discount rate. (Round the net present value to the nearest dollar.)
4. Compute the net present value of the investment if MACRS depreciation is used. Use 15% as the discount rate. (Round the net present value to the nearest dollar.)
Analysis Component
5. Explain why the MACRS depreciation method increases the net present value of thisproject.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
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Related Book For  book-img-for-question

Fundamental Accounting Principles

ISBN: 978-0078110870

20th Edition

Authors: John J. Wild, Ken W. Shaw, Barbara Chiappetta

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