This preview shows pages 1–3. Sign up to view the full content.

Additional Solutions: Chapter Eight: After-Tax Analysis 8S.1 This question was set in Australia, and Australian tax laws were summarised in the Powerpoint presenta- tion of October 10. However, I will also accept as correct those answers which assume Australia to be a province of Canada and apply Canadian tax laws. The best approach is to calculate the present worth of the purchase price and salvage value, convert this to an equivalent annual cost, then add on the operating expenses, which are already expressed as an equivalent annual cost: Under Australian tax law, the annual depreciation over the twelve-year life will be 150%/12 = 12.5%. So the present worth of the purchase is PW = -9 600 + 9 600( P/A ,-12.5%, 8%, 12)× 0.5   × 0.125 We recall that ( P/A,g,i,N ) = ( P/A,i o ,N )/(1 + g ) where i o = (1 + i )/(1 + g ) – 1 = (1+0.08)/(1 – 0.125) -1 = 23.4% So the PW of the purchase is -9 600 + 9 600 ×3.9307× 0.5 ×0.125 = - 7 241 After 12 years, the book value of the machine will be 9 600 (1-0.125) 12 = \$1934. The salvage value is less than this, so the company can claim the difference between the book value and the salvage value as a loss, which can be offset against profits. So the after-tax income from the salvage is 1,600(1-0.5) + 334(0.5) = 1934 × 0.5 and the present value of this is 1934 × 0.5× ( P/F ,0.08,12) = \$372 We convert the after-tax present worths of purchase and salvage to an annuity over twelve years, and sub- tract the after-tax annual cost of running the machine: AW = (-7 241 + 372)( A/P ,0.08,12) – 2 100(0.5) = -1 993 So it costs -\$1 993 to run the machine. (We cannot conclude from this whether or not the company should buy it – that depends on the value to the company of the service it provides.)

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
*8S.2 There are a couple of ways to solve this question, depending on how accurately we model the US Tax System. The depreciation schedules used by the IRS were given in the October 10 Powerpoint presentation, Slide40. We can use these schedules to create a spreadsheet, such as 8S2.xls . The first three columns of this spreadsheet are taken from Table 8.8 in the textbook. The difference in allowable depreciation for each year is simply the difference between the second and third column, multiplied by the total cost of the equipment, \$800 000, and divided by 100 to convert from percentages to fractions. Since the company is taxed at 50%, it saves half the difference in allowable depreciation every year.
This is the end of the preview. Sign up to access the rest of the document.