1. Compute the depreciation schedule for the following asset:
Cost of asset
120,000
Useful life
6 years
Salvage value
15,000
(10 points) 1a. Find the book value and annual depreciation using the double-declining balance?
N
Dn
Bn
1
40000
80000
2
26667
53333
3
17778
35555
4
11852
23703
5
7901
15801
6
802
15000
(5 points) 2. What is the one thing that can not be depreciated?
Land
3. I want to evaluate the feasibility of the following project:
Project life
Initial cost (also depreciable basis)
Tax depreciation method
Salvage value
Sales
Labor and material
Income tax rate
2 years
40,000
3 yr MACRS property
6,000
30,000
15,000
30%
(10 points). 3a. What is the allowed tax depreciation and book value for years 1 and 2 using the
MACRS method? Assume that I will sell the equipment at the end of year 2. The IRS
percentage rates for depreciation are 33.33, 44.45, 14.81, and 7.41% for years 1, 2, 3, and 4,
respectively.
N
1
2
%
33.33
44.45/2
Dn
13,332
8,890
Bn
26,668
17,778
(10 points). 3b. What is the capital gain (or loss) when I sell the equipment for 6,000?
Loss of 11,778
(5 points). 3c. Assuming the gains tax rate is 30%, what is the tax owed (or credit)?
Tax credit of 3533.4
(15) 4a. You are working for a dairy company that wants to develop a frozen milk drink. You
expect to spend 10 million dollars to install the equipment to produce the drinks. The equipment
has an expected life of 10 years, a salvage value of 500,000, and annual operating costs of
1,000,000. If your company has a MARR of 10%/yr and you expect to produce 750,000 cases of
product, what is the minimum selling price for each case of milk drink.
$3.46/case
(5) 4b. Your company purchased land for the plant at a cost of 1 million dollars and the plant
cost 9 million dollars to build. What is the depreciable basis?
9,000,000
(15) 4c. If the entire plant is classified as a three year property, what is the tax depreciation and
book value each year? The percentages are 33.33, 44.45, 14.81, and 7.41 for years 1, 2, 3, and 4
respectively.
n
%
Dn
1
33.33
2,999,700
2
44.45
4,000,500
3
14.81
1,332,900
4
7.41
666,900
5. I want to evaluate the feasibility of the following project:
Project life
Initial cost (also depreciable basis)
Tax depreciation method
Salvage value
Sales
Labor and material
Income tax rate
Bn
6,000,300
1,999,800
666,900
-
2 years
40,000
3 yr MACRS property
6,000
30,000
15,000
30%
(10 points). 5a. What is the allowed tax depreciation and book value for years 1 and 2 using the
MACRS method? Assume that I will sell the equipment at the end of year 2. The IRS
percentage rates for depreciation are 33.33, 44.45, 14.81, and 7.41% for years 1, 2, 3, and 4,
respectively.
N
1
2
%
33.33
44.45/2
Dn
13,332
8,890
Bn
26,668
17,778
(10 points). 5b. What is the capital gain (or loss) when I sell the equipment for 6,000?
Loss of 11,778
(5 points). 5c. Assuming the gains tax rate is 30%, what is the tax owed (or credit)?
Tax credit of 3533.4
5d. With an income tax rate of 30%, what is my taxable income and income tax owed in year 1?
Taxable income = 30,000-13,332-15,000 = 1,668
Tax owed = 500.4
(15) 6. A computerized machining center has been proposed for a small manufacturing company.
The machine has an initial cost of 120,000. If it is installed it will generate annual revenues of
100,000 and an additional 10,000 labor cost per year would be incurred. The machining center
would be classified as a 3-year MACRS property. The salvage value after 3 years will be 5,000
and the marginal tax rate of the company is 40%. Should the equipment be installed if the
MARR of the company is 15%?
Year
0
1
2
3
Income Statement
Revenues
100,000
100,000
100,000
Labor
10,000
10,000
10,000
Rate
33.33
44.45
14.8/2
Depreciation
39,996
53,340
8,880
Taxable income
50,004
36,660
81,120
Income taxes
20,002
14,664
32,448
Net income
30,002
21,996
48,672
Net income
30,002
21,996
48,672
Depreciation
39,996
53,340
8,880
Expenses
Cash Flow
Statement
Operating activities
Investment activities
Investment
(120,000)
Salvage
5,000 (loss of
12,784)
Credit 5,114
Gains tax
Net cash flow
-120,000
69,998
75,336
67,666
NPW positive, good
A project has the following cash flows. What is the internal rate of return for the following
project? If the minimum attractive rate of return is 10%, is this a good project?
n
Cash flow
0
-10,000
1
7,000
2
7,000
25.7%, good.
7. I am working on converting biomass to ethanol. We think we could build a plant over a two
year period and produce 70 million gallons of ethanol per year for 10 years. Assume that the
annual expenses to produce ethanol are $85 million this takes into account all feedstock costs,
labor, energy, etc.). The plant will take 2 years to build and I will spend 100 million dollars each
year. Ignoring salvage value, at a minimum attractive rate of return (MARR) of 10%
compounded annually, what is the minimum ethanol selling price ($/gal)?
$1.70/gal
8. Assume you have to buy a new car. You have decided it should be a Toyota Camry or a
Camry hybrid. The mileage is based on city driving, the best case for hybrids. Assume the car
will be driven 12,000 miles per year. Assume the car will last 6 years and your interest rate is
8%/compounded annually. What price of gasoline is required to be indifferent to the cars?
Initial cost
Mileage (miles/gallon)
Salvage value
$4.53/gal
Hybrid
26,150
33
15,000
Regular
18,645
21
10,000
9. You have the choice of two pumps (centrifugal or axial) with a rated size of 10 kW. The
price of electricity is $0.05/kWh. Both motors have a useful life of 10 years and will have no
salvage value. The minimum acceptable rate of return is 8%, which motor do you chose?
Centrifugal
Axial
Purchase price
1,300
1,600
Efficiency
80%
83%
Annual operating costs
130
160
(taxes, insurance, etc.)
How many hours per year would the pumps need to operate to be indifferent to which pump is
purchased?
3247 hr/yr