Concept explainers
Concept introduction:
Requirement 1:
Preparing 5 column table reporting following for 6 years(assuming straight line depreciation) (a)income before depreciation and tax,(b) depreciation expenses-
Answer to Problem 3PSA
year | Income before depreciation 123 A | Depreciation-straight line 123 B | Income taxable 123 C | 40% income taxed 123 D=C*.40 | Profit after tax(PAT) 123 E=C-D | Cash flow after taxes 123 F=A-D |
1 | 66000 | 9000 | 57000 | 22800 | 34200 | 43200 |
2 | 66000 | 18000 | 48000 | 19200 | 28800 | 46800 |
3 | 66000 | 18000 | 48000 | 19200 | 28800 | 46800 |
4 | 66000 | 18000 | 48000 | 19200 | 28800 | 46800 |
5 | 66000 | 18000 | 48000 | 19200 | 28800 | 46800 |
6 | 66000 | 9000 | 57000 | 22800 | 34200 | 43200 |
Explanation of Solution
year | Income before depreciation 123 A | Depreciation-straight line 123 B | Income taxable 123 C | 40% income taxed 123 D = C*.40 | Profit after tax(PAT) 123 E = C-D | Cash flow after taxes 123 F = A-D |
1 | 66000 | 9000 | 57000 | 22800 | 34200 | 43200 |
2 | 66000 | 18000 | 48000 | 19200 | 28800 | 46800 |
3 | 66000 | 18000 | 48000 | 19200 | 28800 | 46800 |
4 | 66000 | 18000 | 48000 | 19200 | 28800 | 46800 |
5 | 66000 | 18000 | 48000 | 19200 | 28800 | 46800 |
6 | 66000 | 9000 | 57000 | 22800 | 34200 | 43200 |
Concept introduction:
Net present value is difference between present value of inflow and present value of outflows, if net present value is positive project is recommended.
Requirement 2:
To explain:
Preparing 5 column table reporting following for 6 years(assuming MACRS depreciation) (a) income before depreciation and tax,(b) depreciation expenses-straight line method ,(c) income taxable,(d) income tax,(e) net cash flow, it equals the amount of income before depreciation and deduct taxes.
Answer to Problem 3PSA
year | Income before depreciation 123 A | Depreciation-MACRS 123 B | Income taxable 123 C | 40% income taxed
D=C*.40 |
Profit after tax(PAT) 123 E=C-D | Cash flow after taxes 123 F=A-D |
1 | 66000 | 18000 | 48000 | 19200 | 28800 | 46800 |
2 | 66000 | 28800 | 37200 | 14880 | 22320 | 51120 |
3 | 66000 | 17280 | 48720 | 19488 | 29232 | 46512 |
4 | 66000 | 10368 | 55632 | 22252.8 | 33379.2 | 43747.2 |
5 | 66000 | 10368 | 55632 | 22252.8 | 33379.2 | 43747.2 |
6 | 66000 | 5184 | 60816 | 24326.4 | 36489.6 | 41673.6 |
Explanation of Solution
year | Income before depreciation 123 A | Depreciation-MACRS 123 B | Income taxable 123 C | 40% income taxed 123 D=C*.40 | Profit after tax(PAT) 123 E=C-D | Cash flow after taxes 123 F=A-D |
1 | 66000 | 18000 | 48000 | 19200 | 28800 | 46800 |
2 | 66000 | 28800 | 37200 | 14880 | 22320 | 51120 |
3 | 66000 | 17280 | 48720 | 19488 | 29232 | 46512 |
4 | 66000 | 10368 | 55632 | 22252.8 | 33379.2 | 43747.2 |
5 | 66000 | 10368 | 55632 | 22252.8 | 33379.2 | 43747.2 |
6 | 66000 | 5184 | 60816 | 24326.4 | 36489.6 | 41673.6 |
Concept introduction:
Net present value is the difference between present value of inflow and present value of outflows, if net present value is positive project is recommended.
Requirement 3:
Computation of net present value(NPV) of the investment if staright line depreciation method is used, using 10% discount rate.
Answer to Problem 3PSA
Net present value(NPV) | 108521.4 |
Explanation of Solution
year | Cash flow after tax | Present value at 10% of 1 | Net present value(NPV) |
1 | 43200 | .909090909 | 39272.73 |
2 | 46800 | .826446281 | 38677.69 |
3 | 46800 | .751314801 | 35161.53 |
4 | 46800 | .683013455 | 31965.03 |
5 | 46800 | .620921323 | 29059.12 |
6 | 43200 | .56447393 | 24385.27 |
Total A | 198521.4 | ||
90000 | |||
Net present value(NPV) A-B | 108521.4 |
Concept introduction:
Net present value-is difference between present value of inflow and present value of outflows, if net present value is positive project is recommended.
Requirement 4:
Computation of net present value(NPV) of the investment if MAcrs depreciation method is used, using 10% discount rate.
Answer to Problem 3PSA
Net present value(NPV) | 110305.7 |
Explanation of Solution
Year | Cash flow after tax | Present value at 10% of 1 | Net present value(NPV) |
1 | 46800 | .909090909 | 42545.45 |
2 | 51120 | .826446281 | 42247.93 |
3 | 46512 | .751314801 | 34945.15 |
4 | 43747.2 | .683013455 | 29879.93 |
5 | 43747.2 | .620921323 | 27163.57 |
6 | 41673.6 | .56447393 | 23523.66 |
Total A | 200305.7 | ||
Cash outflow B | 90000 | ||
Net present value(NPV) A-B | 110305.7 |
Concept introduction:
Net present value-is difference between present value of inflow and present value of outflows, if net present value is positive project is recommended.
Requirement 5:
MARC’s depreciation method increases the net present value(NPV) of this project’s.
Answer to Problem 3PSA
Using MARCS depreciation net present value (NPV) is greater than the net present value (NPV) using straight-line depreciation as the cash flows are higher in the starting year of asset’s life under MARCS depreciation. Due to which depreciation is deducted at a larger amount leading to fewer income taxes paid in starting years.
Explanation of Solution
Using MARCS depreciation net present value (NPV) is greater than the net present value(NPV) using straight line depreciation as the cash flows are higher in the starting year of asset’s life under MARCS depreciation. Due to which depreciation are deducted at larger amount leading to less income taxes payment in starting years.
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Chapter 11 Solutions
MANAGERIAL ACCOUNTING FUND. W/CONNECT
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