Question

Manning Corporation is considering a new project requiring a $80,000 investment in test equipment with no salvage value. The project would produce $67,500 of pretax income before depreciation at the end of each of the next six years. The company’s income tax rate is 38%. 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 MACRS) (Use appropriate factor(s) from the tables provided.)

	Straight-Line Depreciation					MACRS Depreciation*
Year 1		$	8,000				$	16,000
Year 2			16,000					25,600
Year 3			16,000					15,360
Year 4			16,000					9,216
Year 5			16,000					9,216
Year 6			8,000					4,608
Totals		$	80,000				$	80,000

* The modified accelerated cost recovery system (MACRS) for depreciation is discussed in Chapter 8.

Complete the following table assuming use of straight-line depreciation. Net cash flow equals the amount of income before depreciation minus the income taxes.

Answer 1

Solution:

Computation of net cash flow
Particulars	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Pretax income before depreciation	$67,500.00	$67,500.00	$67,500.00	$67,500.00	$67,500.00	$67,500.00
Less: Depreciation	$8,000.00	$16,000.00	$16,000.00	$16,000.00	$16,000.00	$8,000.00
Income before taxes	$59,500.00	$51,500.00	$51,500.00	$51,500.00	$51,500.00	$59,500.00
Income tax (38%)	$22,610.00	$19,570.00	$19,570.00	$19,570.00	$19,570.00	$22,610.00
Net Income	$36,890.00	$31,930.00	$31,930.00	$31,930.00	$31,930.00	$36,890.00
Add: Depreciation	$8,000.00	$16,000.00	$16,000.00	$16,000.00	$16,000.00	$8,000.00
Net Cash flow	$44,890.00	$47,930.00	$47,930.00	$47,930.00	$47,930.00	$44,890.00