Exam 7: Depreciation and Income Taxes

A private metropolitan mass transit system operator wants to add a new trolleybus to its fleet. The following information is prepared for the economic evaluation. Either trolley is to be used for 8 years and sold for the estimated salvage value. The before- tax MARR is 12.31% per year and the effective tax rate is 35%. Using SL depreciation, select a machine on the basis of after- tax annual worth analysis. Alternative T 1 T2 First costs \ 490,000 \ 475,000 Annual benefits \ 110,000 \ 93,000 Salvage value \ 39,000 \ 34,000 Useful life, years 10 8

Mountaineer Transportation, Inc. had the following information at the end of the year. For an effective federal tax of 38% and state income tax of 7.5% per year, determine the company's BTCF, ATCF, and NOPAT for the year. Total Revenues $550,000 Operating Expenses $130,000 Depreciation $111,000

A machine used in the manufacture of fabricated metal products at Crimson Tide Inc., with a useful life of 12 years, is to be depreciated by the MACRS method for tax depreciation purposes. The machine has a first cost of $23,000 with a $3000 salvage value. The company's controller wants to understand the effects of the difference in the annual depreciation charge for SL and MACRS with GDS recovery period. Using a half- year convention for both methods, determine the differences in the book value if the machine is sold at the end of year 5.

For depreciation purposes, a 150% declining balance depreciation is used for a material handling lift truck with a cost basis of $23,000 and a salvage value of $6250 at the end of its useful life of 5 years. If the MACRS depreciation method with a 3- year recovery period is used for tax purposes, determine the difference between the annual depreciation after 2 years calculated from both depreciation methods.

Bulldog Shipping, Inc. has purchased new cargo containers for $500,000. MACRS with a 5- year recovery period and an estimated salvage value of $96,000 is to be used to write off the capital investment. The company expects to realize net revenue of $170,000 each year for the next 6 years. Assume an effective federal tax of 38%, state income tax of 10.5% per year, and an after- tax MARR of 13% per year. Calculate the present worth of this investment.

ADD Systems Corp. reported a gross income of $590,000, and depreciation and expenses total $225,000 for the year. If the state income tax is 6% per year, determine the average federal tax rate and overall effective tax rate.

A manufacturer of hardboard and fiber cement sidings and panels purchased new equipment for its new product line for $20,000. A declining balance depreciation at a rate of 1.5 times the straight line rate with a 5- year recovery period and an estimated salvage value of $8000 was used to write off the capital investment. The company expects to realize net revenue of $57,000 each year for the next 5 years. However, due to the sudden change in business direction, the company decided to sell the equipment after 2 years of operation for $21,000. Assuming an effective tax of 40% and an after- tax MARR of 12% per year, calculate the future worth of the after- tax cash flow at the end of year 2.

A petroleum refining and recovery service company, Cowboy Enterprises, purchased $13,000 worth of equipment for reconditioning fuels in its storage tanks. The equipment has a functional life of 14 years and a salvage value of 5% of the purchased price. Use MACRS depreciation with a 10- year recovery period to determine the book value after 4 years.

A construction company has an effective income tax rate of 38%. The company must purchase one of the following two models of tower cranes for its new project. The after- tax MARR is 12% per year. Select a crane on the basis of present worth of the EVA estimates using MACRS with a 5- year recovery period. Machine Model Q Model R First costs \ 21,000 \ 22,000 Net Annual Revenue \ 15,500 \ 15,800 Market Value at the end of useful life \ 1100 \ 2100 Life, years 6 6