12. Meane Company is trying to plan ahead for upcoming income tax changes expected after the...
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12. Meane Company is trying to plan ahead for upcoming income tax changes expected after the 2024 election. Meane is considering acquiring an asset in January 2025 for a cost of $600,000 that will last for eight years and have a residual value of $80,000 at that time. The asset is expected to bring in net cash benefits of $300,000 a year before income taxes over the life of the project. Meane's accountant is trying to chose the best depreciation method, i.e., the one that contributes to the maximum Net Present Value of the project, given the expected applicable income tax rates: Year Tax Rates 2025 25% 2026 30% 2027 35% 2028 2029 2030 2031* 40% 40% 45% 45% * Rates are expected to remain at 45% after 2031. For income tax purposes, the company will depreciate the asset over a five-year period to a zero salvage value using the Straight-line method or as a five-year MACRS asset (See Problem 11). Required: a. Using the company's 14% required rate of return, determine which method leads to the greater NPV and the amount by which if exceeds the other alternative. b. Is there a required rate of return where the two methods would provide identical NPV's? If so, what is it? 12. Meane Company is trying to plan ahead for upcoming income tax changes expected after the 2024 election. Meane is considering acquiring an asset in January 2025 for a cost of $600,000 that will last for eight years and have a residual value of $80,000 at that time. The asset is expected to bring in net cash benefits of $300,000 a year before income taxes over the life of the project. Meane's accountant is trying to chose the best depreciation method, i.e., the one that contributes to the maximum Net Present Value of the project, given the expected applicable income tax rates: Year Tax Rates 2025 25% 2026 30% 2027 35% 2028 2029 2030 2031* 40% 40% 45% 45% * Rates are expected to remain at 45% after 2031. For income tax purposes, the company will depreciate the asset over a five-year period to a zero salvage value using the Straight-line method or as a five-year MACRS asset (See Problem 11). Required: a. Using the company's 14% required rate of return, determine which method leads to the greater NPV and the amount by which if exceeds the other alternative. b. Is there a required rate of return where the two methods would provide identical NPV's? If so, what is it?
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To determine which depreciation method leads to the greater Net Present Value NPV for Meane Company we need to calculate the cash flows and apply the required rate of return Lets compare the Straightl... View the full answer
Related Book For
Data Analysis and Decision Making
ISBN: 978-0538476126
4th edition
Authors: Christian Albright, Wayne Winston, Christopher Zappe
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