Discussion 8

Discussion 8 - ISE 460 Fall 2010 Discussion 8 Click to edit...

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Unformatted text preview: ISE 460 Fall 2010 Discussion 8 Click to edit Master subtitle style 12/1/10 Chapter 9 – Example Zerex Paving Company purchased a hauling truck on January 1, 2005, at a cost of$32,000. The truck has a useful life of eight years with an estimated salvage value of $5,000. The straight­line method is used for book purposes. For tax purposes, the truck would be depreciated with the MACRS method over its five­year class life. ◦ Determine the annual depreciation amount to be taken over the useful life of the hauling truck for both book and tax 12/1/10 Chapter 10 – Example An automobile­manufacturing company is considering purchasing an industrial robot to do spot welding, which is currently done by skilled labor. The initial cost of the robot is $185,000, and the annual labor savings are projected to be $120,000. If purchased, the robot will be depreciated under MACRS as a five­year recovery property. The robot will be used for seven years, at the end of which time the firm expects to sell it 12/1/10 Income Statement Revenues (Savings) Expenses: Depreciation Taxable Income Income Taxes (35%) Net Income Cash Flow 0 1 2 3 4 5 6 7 Statement Cash from operations: Net Income Depreciation Investment/Salvag ($185,00 e 0) Gains Tax Net Cash Flow (Actual) $40,000 12/1/10 Chapter 11 – Example You are planning on depositing $1000 each year into a bank account for the next 5 years. The bank account pays an annually compounded interest rate of 5%. The inflation rate for the next year is 3.5%, but you expect it to go up by 0.5% each year for the following 2 years and remain the same for the 2 years after that. ◦ What would be average inflation rate over the next 5 years? What would be the value of your deposits in constant dollars? What would be the future value of your savings in constant and actual dollars? 12/1/10 ◦ ◦ Chapter 11 – Example Johnson Chemical Company has just received a special subcontracting job from one of its clients. The two­year project requires the purchase of a special­purpose painting sprayer of $60,000. This equipment falls into the MACRS five­year class. After the subcontracting work is completed, the painting sprayer will be sold at the end of two years for $40,000 (actual dollars). The painting system will require an increase of $5,000 in net 12/1/10 Income Statement Revenue Expenses: O&M Expenses Depreciation Taxable Income Income Taxes Net Income Cash Flow Statement Cash from operations: Net Income Depreciation Investment/Salvage Working Capital Gains Tax Net Cash Flow (Actual) MARR' i PW 0 ($60,000) ($5,000) 15% 8% 1 2 $40,000 MARR 12/1/10 ...
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