Hibra, an EE student who is also taking a business minor, is studying depreciation in her engineering management and finance courses. The assignment in both classes is to demonstrate that shorter recovery periods require the same total taxes, but they offer a time-value-of-taxes advantage for depreciable assets. Help her using asset estimates made for a 6-year study period: P = $65,000, S =$5000, GI = $32,000 per year, AOC = $10,000 per year, SL depreciation, i = 12% per year, and Te = 31%. (a) Perform the comparison using recovery periods of 3 and 6 years. (b) Develop the spreadsheet solution. (c) For a spreadsheet function challenge, construct a single-cell function to determine the PW of taxes for the 3-year and 6-year analyses.
What will be an ideal response?
(a) Recovery over 3 years. SL depreciation is 60,000/3 = $20,000 per year
Year 1-3: Taxes = (GI - OE - D)(Te)
= (32,000 - 10,000 - 20,000)(0.31)
= $620
Year 4-6: Taxes = (GI - OE)( Te )
= (32,000 - 10,000)(0.31)
= $6820
Total taxes = 3(620) + 3(6820) = $22,320
PWtax = 620(P/A,12%,3) + 6820(P/A,12%,3)(P/F,12%,3)
= 620(2.4018) + 6820(2.4018)(0.7118)
= $13,149
Recovery over 6 years. SL depreciation is 60,000/6 = $10,000 per year
Year 1-6: Taxes = (GI – OE – D)( Te )
= (32,000 - 10,000 - 10,000)(0.31)
= $3720
Total taxes = 6(3720) = $22,320
PWtax = 3720(P/A,12%,6)
= 3720(4.1114)
= $15,294
Recovery in 3 years has a lower PWtax value; total taxes are the same for both.
(b) Spreadsheet: Solution follows with only the functions shown.
(c) Spreadsheet functions:
Function for 3-year recovery: = -PV(12%,3,620) + PV(12%,3,,PV(12%,3,6820))
displays $13,148
Function for 6-year recovery: = -PV(12%,6,3720) displays $15,294
You might also like to view...
It takes 10 minutes at 42 seconds to travel 10 miles on a freeway. What is the average speed?
What will be an ideal response?
What type of electrical current does a fuel cell generate?
A) Alternating current B) Direct current C) Both A and B D) Neither A nor B
Which type of regulator produces an output voltage that is opposite in polarity from the input?
A) step-up B) step-down C) cross-over regulator D) inverting
In your own words, explain evaporation and condensation.
What will be an ideal response?