Question

Tax Problem: (12pts)------ Please complete in Excel or by hand.

In 2018, you purchased a piece equipment for $125,000. You will use the Straight Line Depreciation method and will use a salvage value of $5,000. The equipment has a depreciable and useful life of five years. The first-year benefit is $20,000 and increases by $5,000 each year thereafter. You sell the equipment at the end of year 5 for $21,000. You are in the 32% tax bracket and ordinary gains/losses are taxed at the same rate.

Answer the following questions:

1. What amount of taxes do you owe on the depreciation recapture (Ordinary Gains tax on the sale of the equipment)?

2. What is the value of the After Tax Cash Flow in year 5?

3. What is the After Tax NPW or the After Tax ROR on the investment?

4. If you have a MARR of 7% is this a good investment?

Answer 1

(1)
Value of Equipment	125000
Salvage Value	5000
Useful Life	5 Years
Depreciation per year	24000
Value of Asset after 5years	5000
Selling Price of Equipment	21000
Gain on sale of Equipment	16000
Taxes on the sale of equipment	5120
(2)
	Cashflows	Taxable cashflows	Tax Rate	Tax	Cashflow After Tax
Cashflow in first Year	20000	20000	32%	6400	13600
Cashflow in 2nd year	25000	25000	32%	8000	17000
Cashflow in 3rd year	30000	30000	32%	9600	20400
Cashflow in 4th year	35000	35000	32%	11200	23800
Cashflow in 5th year	61000	56000	32%	17920	43080
Cashflow after Tax in year 5 is 43080.