Chapter 13 Income Taxes

(P/A, i%, 5) = = 3.500 At i% P/A = 3.500
At 15% P/A = 3.352
By interpolation:
ROR = 13.25%
b) ROR AFTER TAX
PW B = PW C
8,980(P/A, i%, n) = 35,000 At 8% P/A = 3.993
(P/A, i%, 5) = = 3.898 At i% P/A = 3.898
At 9% P/A = 3.890
By interpolation:
ROR = 8.92%
Chapter 13 Income Taxes 187
13-12
A large and profitable company, in the 34% income tax bracket, is considering the purchase of a
new piece of machinery that will yield benefits of $10,000 for year 1, $15,000 for year 2, $20,000
for year 3, $20,000 for year 4, and $20,000 for year 5. The machinery is to be depreciated using
the modified accelerated cost recovery system (MACRS) with a three-year recovery period. The
MACRS percentages are 33.33, 44.45, 14.81, 8.41, respectively, for years 1, 2, 3, and 4. The
company believes the machinery can be sold at the end of five years of use for 25% of the original
purchase price. What is the maximum purchase cost the company can pay if it requires a 12%
after-tax rate of return?
Solution
Year BTCF Depreciation T.I. Taxes ATCF
0 -P - - - -P
1 10,000 .3333P 10,000 - .3333P 3,400 + .1133P 6,600 + .1133P
2 15,000 .4445P 15,000 - .4445P 5,100 + .1511P 9,900 + .1511P
3 20,000 .1481P 20,000 - .1481P 6,800 + .0504P 13,200 + .0504P
4 20,000 .0841P 20,000 - .0841P 6,800 + .0286P 13,200 + .0286P
5 20,000 - 20,000 6,800 13,200
.25P - .25P .085P .165P
P = 6,600(P/A 12%, 3) + 3,300(P/G, 12%, 3) + 13,200(P/A, 12%, 2)(P/F, 12%, 3)
+ .1133P(P/F, 12%, 1) + .1511P(P/F, 12%, 2) + .0504P(P/F, 12%, 3)
+ .0285P(P/F, 12%, 4) + .165P(P/F, 12%, 5)
P = $61,926.52
13-13
A company bought an asset at the beginning of 2007 for $100,000. The company now has an
offer to sell the asset for $60,000 at the end of 2008. For each of the depreciation methods shown
below determine the capital loss or recaptured depreciation that would be realized for 2008.
Depreciation Depreciable Salvage Recaptured Capital