Evaluate the combined income tax rate

Reference no: EM136142

XYZ Company is allowing for purchasing an asset for $100,000 that has a 5 year useful life and a $20,000 salvage value. Double declining balance (DDB) depreciation can be used. The asset can produce $50,000/year in savings but will cost $10,000/year to operate. The company is subject to a 35 percent federal income tax rate and a 9 percent state income tax rate. It uses an after-tax MARR of 20%

1). Evaluate the combined (state+ federal) income tax rate for XYZ company. Use this rate for evaluating after tax cash flows

2). Evaluate the after tax cash flow for this investment. Make adjustment in the DDB depreciation charges if required in any year in light of SV of $20K

3). Using the after tax rate of return or present worth, evaluate if this investment is worth.

4). Consider the company sells the asset as the end of the third year for $30,000. Evaluate the equipment's final book value in Year 3 and the depreciation recapture.

Reference no: EM136142

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