Example 2 Facts: McLean Inc. is considering the purchase of a new machine, which will cost...
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Example 2 Facts: McLean Inc. is considering the purchase of a new machine, which will cost $150,000. Ini The machine has an estimated useful life of three years. Assume for simplicity that the equipment will be fully depreciated for tax purposes 30 percent, 40 percent, and 30 percent in each of the three years, respectively. The new machine will have a $10.000 resale value at T the end of its estimated useful life. The machine is expected to save the company $85.000 per year in operating expenses. McLean uses a 40 percent estimated income tax rate and a 16 percent hurdle rate to evaluate capital projects. 000 T) Discount rates for a 16 percent rate are as follows: ant if ary Year 1 Year 2 Year 3 Net Present Value Present Value of $1 0.862 0.743 0.641 Present Value of an Ordinary Annuity of $1 0.862 1.605 2.246 • Use if each FC Required: Calculate the net present value of the proposed purchase of the new machine. (continued) Example 2 Facts: McLean Inc. is considering the purchase of a new machine, which will cost $150,000. Ini The machine has an estimated useful life of three years. Assume for simplicity that the equipment will be fully depreciated for tax purposes 30 percent, 40 percent, and 30 percent in each of the three years, respectively. The new machine will have a $10.000 resale value at T the end of its estimated useful life. The machine is expected to save the company $85.000 per year in operating expenses. McLean uses a 40 percent estimated income tax rate and a 16 percent hurdle rate to evaluate capital projects. 000 T) Discount rates for a 16 percent rate are as follows: ant if ary Year 1 Year 2 Year 3 Net Present Value Present Value of $1 0.862 0.743 0.641 Present Value of an Ordinary Annuity of $1 0.862 1.605 2.246 • Use if each FC Required: Calculate the net present value of the proposed purchase of the new machine. (continued)
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1 Calculate the tax depreciation deduction and tax savings in each year Year 1 150000 x 30 450... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-0324312140
16th Edition
Authors: James D. Stice, Earl K. Stice, Fred Skousen
Posted Date:
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