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An owner of a large ranch is considering the purchase of a tractor with a front-end loader to clean his corrals instead of hiring workers that do it with a pitch fork. He has given you the following information and has asked you to evaluate this investment. The equipment costs $40,000. The rancher expects that he will save $11,500 a year that is usually paid to workers that clean out the corral by hand. However, he will incur an additional cost of $1,000 for fuel, repairs and maintenance. The rancher plans on keeping the equipment for 3 years before replacing it with a new one. He thinks he can sell the old equipment for $25,000 in three years. The rancher anticipates that his marginal tax rate will be 20 percent over the next three years. The IRS will allow the rancher to depreciate the tractor over seven yearsusing the straight-line method. The rancher requires at least a 15% pretax rate of return on capital (pretax).
1. What is the annual after-tax Net Returns?
A. 11,500
B. 9,200
C. 10,500
D. 8,400
E. None of the Above
2. What is the tax savings from depreciation?
A. 5,714
B. 40,000
C. 1,143
D. 2,667
E. None of the above
3. What is the after- tax terminal value in three years?
A. 24,571
B. 25,000
C. 40,000
D. 17,145
E. none of the above
4. What is the accumulated depreciation over the three years?
A. 5,715
B. 40,000
C. 8,000
D. 17,145
E. none of the above
5. What is the after- tax discount rate?
A. 15%
B. 12%
C. 3%
D 10%
E. None of the above
6. What is the present value of the after- tax net returns?
A. 40,000
B. 410
C. 17,489
D. 2,755
E. 20,175
F. None of the above
7. What is the present value tax savings from depreciation?
A. 40,000
B. 410
C. 17,489
D. 2,755
E. 20,175
F. None of the above
8. What is the present value of the after- tax terminal value?
A. 40,000
B. 410
C. 17,489
D. 2,755
E. 20,175
F. None of the above
9. What is the Net Present Value?
A. 40,000
B. 410
C. 17,489
D. 2,755
E. 20,175
F. none of the above
10. What is the maximum fuel, repairs and maintenancecost that can be paid each year to operate the loader and still find this investment profitable?
A. 1,213
B. 10,287
C. 11,500
D. 867
E. None of the above

Respuesta :

batolisis

Answer:

1) none of the above  $3828.57 ( E )

2) $1143 ( c )

3)  $24571 ( A )

4)  $17142.86 ( E )

5) 12% ( B )

6) $410 ( B )

7) $2744.95 ( f )

8) $17,489 ( c )

9) $24282.36 ( F )

10) 867

Explanation:

1)  The annual after-tax net returns

net income = cash flow - depreciation

                 = $10500 - [tex]\frac{cost of equipment}{estimated life}[/tex]  =   10500 - (40000/7) = $4785.71

calculate the annual net after tax returns = net income * (1 - Tax rate ) = 4785 * (0.80) = $3828.57

2) Tax savings from depreciation

Tax savings from depreciation = Depreciation amount * Tax rate

                                                   = [tex](\frac{equipment cost}{estimated life} ) * Tax rate[/tex]

                                                  = (40000/7) * 0.2 = $1142.86 ≈ $1143

3) After tax terminal value in three years

Sale value = $25000,

Book value = 40000 - ( 5714.29 * 3 ) = $22857.13

Gain on sale = sale value - book value = $2142.87

tax rate = gain on sale * tax rate = 2142.87 * 0.2 = $428.57

Terminal value = sales value - tax rate = 25000 - 428.57 ≈ $24571

4) Accumulated depreciation over the three years

= depreciation amount * 3 years

=5714.29 * 3 = $17142.86

5) After tax discount rate

= discount rate * (1 - tax rate )

= 15% * 0.80 = 12%

6) Present value of the after-tax net returns

SOLUTION attached below

7) Present value tax savings from depreciation

= Tax savings from depreciation / ( 1+r)^n  note ; n = 3

= $1142.86 / ( 1 + 0.12 )^3 = $2744.95

8) present value of the after-tax terminal value

Pv of terminal value = Terminal value / ( 1 + r ) ^n

                                = $24571.43 / ( 1 + 0.12 ) ^3 = $17,489

9) Net present value

= net cash flows / ( 1 + r ) ^n

= 34114.29 / ( 1 + 0.12) ^3

= $34114.29 /  1.4049 = $24282.36

AT

Ver imagen batolisis

The correct options for each part of the question is :

  1. E
  2. C
  3. A
  4. E
  5. B
  6. B
  7. F
  8. C
  9. F
  10. D

"After-Tax Returns"

Part 1)

The annual after-tax net returns is :

Cash flow=$10,500

Depreciation=40000/7=5714.28

Net income = cash flow - depreciation

Net income  =   10500 - 5714.28

Net income  = $4785.71

Annual net after tax returns = net income * (1 - Tax rate )

Annual net after tax returns = 4785 * (0.80)

Annual net after tax returns = $3828.57

The annual after-tax net returns is $3828.57.

Thus, the correct option is E.

Part 2)

The Tax savings from depreciation is :

Depreciation=40000/7=5714.28

Tax Rate=0.2

Tax savings from depreciation = Depreciation amount * Tax rate                                              

Tax savings from depreciation = (2714.28) * 0.2

Tax savings from depreciation = $1142.86

Tax savings from depreciation =$1143

The Tax savings from depreciation is $1143.

Thus, the correct option is C.

Part 3)

The after tax -terminal value in three years is :

Sale value = $25000,

Book value = 40000 - ( 5714.29 * 3 )

Book value= $22857.13

Gain on sale = sale value - book value

Gain on sale=  $25000-$22857.13

Gain on sale = $2142.87

Tax rate = gain on sale * tax rate

Tax rate = 2142.87 * 0.2

Tax rate = $428.57

Terminal value = sales value - tax rate

Terminal value = 25000 - 428.57

Terminal value  =$24571

The after tax -terminal value in three years is $24571.

Thus, the correct option is A.

Part 4)

The accumulated depreciation over the three years is :

Accumulated depreciation over the three years= depreciation amount * 3 years

Accumulated depreciation over the three years=5714.29 * 3

Accumulated depreciation over the three years = $17142.86

The accumulated depreciation over the three years is $17142.86.

Thus, the correct option is E.

Part 5)

The after tax discount rate is :

after tax discount rate= discount rate * (1 - tax rate )

after tax discount rate= 15% * 0.80

after tax discount rate = 12%

The after tax discount rate is 12%.

Thus, the correct option is B.

Part 6)

The present value of the after-tax net returns is :

year    Cash Flow    Terminal Tax       Net Cash     Present Value   Present                                

           after Tax                                    Flow             Factor at 12%       value

0          -40,000                                  -40,000                 1                  40000  

1           9542.86                                  9542.86             0.89286        8520

2           9542.86                                  9542.86            0.79719          7608

3           9542.86        24571.43           34114.29             0.71178         24282

                      NET PRESENT VALUE--------------------------------------------$410

The present value of the after-tax net returns is $410.

Thus, the correct option is B.

Part  7)

The present value tax savings from depreciation is :

n = 3

Present value tax savings from depreciation= Tax savings from depreciation / ( 1+r)^n  

Present value tax savings from depreciation= $1142.86 / ( 1 + 0.12 )^3

Present value tax savings from depreciation= $2744.95

The present value tax savings from depreciation is $2744.95

Thus, the correct option is F.

Part  8)

The present value of the after-tax terminal value is :

Present value of terminal value = Terminal value / ( 1 + r ) ^n

Present value of terminal value  = $24571.43 / ( 1 + 0.12 ) ^3

Present value of terminal value = $17,489

The present value of the after-tax terminal value is $17,489.

Thus, the correct option is C.

Part  9)

The Net present value is :

Net present value= net cash flows / ( 1 + r ) ^n

Net present value= 34114.29 / ( 1 + 0.12) ^3

Net present value= $34114.29 /  1.4049

Net present value= $24282.36

The Net present value is $24282.36.

Thus, the correct option is B.

Learn more about " Net Present Value":

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