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What is the present value of the tax effect

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Question - Owen Eyewear is planning to purchase a $520,000 machine to improve the quality and lead time of its eyewear production. Management estimates that this investment will result in an increase in annual cash revenues of $380,000 and increase related operating costs by $32,000. The machine will be depreciated by the straight-line method over a five-year life with a salvage value of $25,000. What is the present value of the tax effect due to using the Modified Accelerated Cost Recovery System (MACRS) deprecation method instead of straight line in Year 1?

Assume a 30% income tax rate and a 12% hurdle rate (cash flows occur evenly throughout the year and the asset will be placed in service at the beginning of the fiscal year). The MACRS depreciation rate for Year 1 of a five-year asset is 20%.

Reference no: EM133005162

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