Make an investment decision about whether a $60,000 automobile should be purchased or not. Assume the automobile to be purchased will have a six-year productive life and no salvage value. It will produce income of $15,000 for the first three years before deductions for depreciation and taxes. In the last three years, the income before depreciation and taxes will be $14,000, $13,000, and $12,000, respectively. Furthermore, assume a tax rate of 35% and a cost of capital of 10% for the analysis. Hint: Use the method described in the lecture. a) What is the cash flow generated each year? b) Why is this automobile depreciated in 6 years? c) Using the present value factor table below, what is the net present value? d) should the automobile purchase be recommended based on the financial analysis?
Year Present value factor (10%) 1 0.909 2 0.826 3 0.751 4 0.683 5 0.621 6 0.564
Problem 5. Assume a firm purchased tech equipment three years ago for $90,000. Let’s assume the tech equipment can be sold for $45,000. A new computer will cost $200,000 but provide cost savings and operating benefits, compared to the old computer, of $24,000 per year for the next six years. Both will have no salvage value after 6 years. These cost savings and operating benefits are the equivalent of increased earnings before depreciation and taxes. The firm has a 35% tax rate and a 10 percent cost of capital. a) What is the book value of the old tech equipment? b) What will be the taxable gain or loss if the old tech equipment is sold? c) What is the net cost of the new tech equipment? d) What are the annual tax shied benefits of purchasing the new equipment? e) What are the annual aftertax savings? f) Using the following Net Present Value table, what is the present value of the incremental benefits? g) Based on the financial analysis, do you recommend purchasing the new tech equipment?
Year Present value factor (10%) 1 0.909 2 0.826 3 0.751 4 0.683 5 0.621 6 0.564

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