New equipment purchase, income taxes. Innovation, Inc. is considering the purchase of a new industrial electric motor
Question:
New equipment purchase, income taxes. Innovation, Inc. is considering the purchase of a new industrial electric motor to improve efficiency at its Fremont plant The motor has an estimated useful life of 5 years. The estimated pretax cash flows for the motor are shown in the table that follows, with no anticipated change in working capital. Innovation has a 12% after-tax required rate of return and a 40% income tax rate. Assume depreciation is calculated on a straight-line basis for tax purposes. Assume all cash flows occur at year-end except for initial investmentamounts.
Relevant Cash Flows at End of 2 Each Year 3 4 $(62,500) Initial motor investment Annual cash flow from operations (excluding the depreciation effect) $31,250 $31,250 $31,250 $31,250 Cash flow from terminal disposal of motor $ 8,000 Calculate (a) net present value, (b) payback period, and (c) internal rate of return. 1. Compare and contrast the capital budgeting methods in requirement 1. 2. 3.
Step by Step Answer:
New equipment purchase income taxes 1 The aftertax cash inflow per year is 23750 18750 5000 as shown ...View the full answer
Cost Accounting A Managerial Emphasis
ISBN: 978-0136126638
13th Edition
Authors: Charles T. Horngren, Srikant M.Dater, George Foster, Madhav
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In accounting terms, depreciation is defined as the reduction of the recorded cost of a fixed asset in a systematic manner until the value of the asset becomes zero or negligible. An example of fixed assets are buildings, furniture, office equipment, machinery, etc. The land is the only exception that cannot be depreciated as the value of land appreciates with time. Depreciation allows a portion of the cost of a fixed asset to be the revenue generated by the fixed asset. This is mandatory under the matching principle as revenues are recorded with their associated expenses in the accounting period when the asset is in use. This helps in getting a complete picture of the revenue
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