Reference no: EM131245279
Basic capital budgeting problem with accelerated depreciation. Assume the same facts as in Problem except that the earnings before depreciation, interest, and taxes are $22,000 per year.
a) Calculate the net present value, using straight-line depreciation for tax purposes.
b) Calculate the net present value, using the sum-of-the-years digits method of accelerated depreciation, for tax purposes.
Problem
Basic capital budgeting problem with straight-line depreciation. The Roberts Company has cash inflows of $140,000 per year on project A and cash outflows of $100,000 per year. The investment outlay on the project is $100,000; its life is 10 years; the tax rate, 'Cc, is 40%. The opportunity cost of capital is 12%.
a) Present two alternative formulations of the net cash flows adjusted for the depreciation tax shelter.
b) Calculate the net present value for project A, using straight-line depreciation for tax purposes.
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Should it be replaced by the new machine
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