Kansas Salt Co. is considering an investment in computer-based production technology as part of a business reengineering

Question:

Kansas Salt Co. is considering an investment in computer-based production technology as part of a business reengineering process. The necessary equipment will cost $18,000,000, have a life of eight years, and generate annual net before-tax cash flows of $3,100,000 from operations. Cost of installation and training is considered nominal. The equipment will have no at the end of its eight-year estimated life. The company’s tax rate and are, respectively, 30 percent and 5 percent.
a. If Kansas Salt Co. uses straight-line depreciation for tax purposes, is the project acceptable using the method?
b. Assume that the tax law allows the company to take accelerated annual depreciation on this asset in the following manner:
Years 1–2 ....... 23% of cost
Years 3–8 ....... 9% of cost
What is the of the equipment? Is it acceptable?
c. Recompute (a) and (b) assuming the tax rate is increased to 40 percent.

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