Part 1-4

Required information Problem 11-3A Computing cash flows and net present values with alternative depreciation methods LO P3 [The following information applies to the questions displayed below.) Manning Corporation is considering a new project requiring a $90,000 investment in test equipment with no salvage value. The project would produce $68,500 of pretax income before depreciation at the end of each of the next six years. The company's income tax rate is 36%. In compiling its tax return and computing its income tax payments, the company can choose between the two alternative depreciation schedules shown in the table. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Straight-Line MACRS Depreciation Depreciation* Year 1 $ 9,000 $18,000 Year 2 18,000 28,800 Year 3 18,000 17,280 Year 4 18,000 10,368 Year 5 18,000 10, 368 Year 6 9,000 5, 184 Totals $90,000 $90,000 * The modified accelerated cost recovery system (MACRS) for depreciation is discussed in Chapter 10. Problem 11-3A Part 1 Required: 1. Complete the following table assuming use of straight-line depreciation. Net cash flow equals the amount of income before depreciation minus the income taxes. Income Before Net Straight- Line Taxable Income Cash Flows Depreciation Depreciation Income Taxes 66,000[ $ | Year $ Year 12 Year 9,000 57.000) 22,800 43,200 18,000 18,000 3 18,000 Year 4 Year 18,000 Required information Problem 11-3A Computing cash flows and net present values with alternative depreciation methods LO P3 [The following information applies to the questions displayed below.) Manning Corporation is considering a new project requiring a $90,000 investment in test equipment with no salvage value. The project would produce $68,500 of pretax income before depreciation at the end of each of the next six years. The company's income tax rate is 36%. In compiling its tax return and computing its income tax payments, the company can choose between the two alternative depreciation schedules shown in the table. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Straight-Line MACRS Depreciation Depreciation* Year 1 $ 9,000 $18,000 Year 2 18,000 28,800 Year 3 18,000 17,280 Year 4 18,000 10,368 Year 5 18,000 10,368 Year 6 9,000 5,184 Totals $90,000 $90,000 * The modified accelerated cost recovery system (MACRS) for depreciation is discussed in Chapter 10. Problem 11-3A Part 2 2. Complete the following table assuming use of MACRS depreciation. Net cash flow equals the income amount before depreciation minus the income taxes. Income MACRS Taxable Income Before Depreciation Depreciation Income Taxes Year Net Cash Flows Year 2 Year 3 Year 4 Year 5 Problem 11-3A Computing cash flows and net present values with alternative depreciation methods LO P3 [The following information applies to the questions displayed below.] Manning Corporation is considering a new project requiring a $90,000 investment in test equipment with no salvage value. The project would produce $68,500 of pretax income before depreciation at the end of each of the next six years. The company's income tax rate is 36%. In compiling its tax return and computing its income tax payments, the company can choose between the two alternative depreciation schedules shown in the table. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Straight-Line MACRS Depreciation Depreciation* Year 1 $ 9,000 $18,000 Year 2 18,000 28,800 Year 3 18,000 17,280 Year 4 18,000 10,368 Year 5 18,000 10,368 Year 6 9,000 5, 184 Totals $90,000 $90,000 * The modified accelerated cost recovery system (MACRS) for depreciation is discussed in Chapter 10. Problem 11-3A Part 3 3. Compute the net present value of the investment if straight-line depreciation is used. Use 8% as the discount rate. Chart Values are Based on: i = Net Cash PV Year Inflow X Factor - Present Value 2 3 4 6 Net present value Problem 11-3A Computing cash flows and net present values with alternative depreciation methods LO P3 [The following information applies to the questions displayed below.) Manning Corporation is considering a new project requiring a $90,000 investment in test equipment with no salvage value. The project would produce $68,500 of pretax income before depreciation at the end of each of the next six years. The company's income tax rate is 36%. In compiling its tax return and computing its income tax payments, the company can choose between the two alternative depreciation schedules shown in the table. (PV of $1. FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Straight-Line MACRS Depreciation Depreciation* Year 1 $ 9,000 $18,000 Year 2 18,000 28,800 Year 3 18,000 17,280 Year 4 18,000 10,368 Year 5 18,000 10,368 Year 6 9,000 5, 184 Totals $90,000 $90,000 * The modified accelerated cost recovery system (MACRS) for depreciation is discussed in Chapter 10. Problem 11-3A Part 4 4. Compute the net present value of the investment if MACRS depreciation is used. Use 8% as the discount rate. Chart Values are Based on: Year Net Cash Inflow PV y X * Factor Present Value 1 2 - 5 Net present value