A plant manager for a fiber optics cable manufacturing company knows that the remaining capital investment in several types of equipment is more closely approximated when the equipment is depreciated linearly by the SL method compared to a rapid write-off method like MACRS. Therefore, he keeps two sets of books, one for tax purposes (MACRS) and one for equipment-management purposes (SL). For an asset that has a first cost of $80,000, a depreciable life of 5 years, and a salvage value equal to 25% of the first cost, determine the difference in the book values shown in the two sets of books at the end of year 3. Which method has the lower book value and by how much?

You are building guest huts at a holiday resort, and you need to choose whether to build your huts out of straw, wood, or brick. Straw is the cheapest but depreciates the most quickly; brick is the most expensive but depreciates least; wood is intermediate. Assume that all types of huts are equally picturesque/functional. They differ only in terms of durability. The cost (and depreciation rates) of the different hut types is:  -  Brick: £3,500 (10% depreciation)  -  Wood: £3,000 (15% depreciation)  -  Straw: £2,500 (20% depreciation)  a) The interest rate is 5%, which type of hut should you buy?  b) The interest rate is 20%, which type of hut should you buy?  c) Intuitively, why were the answers for parts (a) and (b) different? Explain in words.

Hyundai USA has numerous robotic welders as well as robotic checkers with vision. One underbody robotic welder costing $1,200,000 (7-year property class) was installed and is increasing productivity by 2.5% in one area. The result is a savings of $500,000 per year. Deductible expenses other than depreciation and interest associated with the installed robotic welder are only $120,000. Hyundai borrowed $550,000 at 11% for 5 years. They plan to keep the welder for 8 years. Hyundai’s income-tax rate is 25% and their MARR is 9% after taxes. Determine the PW, IRR, for the investment if: The loan is paid back using Plan 3  Plan 3—make equal principal-plus-interest end-of-period payments.

Estimate the approximate after-tax rate of return for a project that has a before-tax ROR of 18.6%. Assume the company's effective tax rate is 26% and it uses MACRS depreciation for an asset that has a $40,000 salvage value. The approximate after-tax rate of return is %.