A profitable incorporated business is considering an investment in equipment having the following before tax cash flow.

Question:

A profitable incorporated business is considering an investment in equipment having the following before tax cash flow. The equipment will be depreciated by double declining balance depreciation with conversion, if appropriate, to straight-line depreciation at the preferred time. For depreciation purposes a $700 salvage value at the end of 6 years is assumed. But the actual value is thought to be $1000 and it is this sum that is shown in the before-tax cash flow

Year Before-Tax Cash Flow

0 $12,000

1 1,727

2 2,414

3 2,872

4 3,177

5 3,358

6 1,997

1,000Salvagevalue

If the firm wants a 9% after-tax rate of return and its increment a income tax rate is 34%, determine by annual cash flow analysis whether the investment is desirable.

Depreciation
Depreciation is an important concept in accounting. By definition, depreciation is the wear and tear in the value of a noncurrent asset over its useful life. In simple words, depreciation is the cost of operating a noncurrent asset producing... 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...