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.

. Compute the net present value of the investment if straight-line depreciation is used. Use 8% as the discount rate.

Answer 1

Chart Values are Based on:
i =	8%
Year	Net Cash Inflow	x	PV Factor	=	Present Value
1	44,890	x	0.9259	=	41,564
2	47,930	x	0.8573	=	41,090
3	47,930	x	0.7938	=	38,047
4	47,930	x	0.7350	=	35,229
5	47,930	x	0.6806	=	32,621
6	44,890	x	0.6302	=	28,290
Present value of cash inflows					216841
Present value of cash outflows					(80,000)
Net present value					$136,841
Workings:
	Income Before Depreciation	Straight-Line Depreciation	Taxable Income	Income Taxes	Net Cash Flows
Year 1	67,500	8,000	59,500	22,610	44,890
Year 2	67,500	16,000	51,500	19,570	47,930
Year 3	67,500	16,000	51,500	19,570	47,930
Year 4	67,500	16,000	51,500	19,570	47,930
Year 5	67,500	16,000	51,500	19,570	47,930
Year 6	67,500	8,000	59,500	22,610	44,890