Mary Meek, the owner of a flower shop, is considering buying a new van for deliv
ID: 2587359 • Letter: M
Question
Mary Meek, the owner of a flower shop, is considering buying a new van for deliveries. She has estimated that the new van would result in a savings of $25,000 per year over the old van. The new van would cost $45,000 and will have a useful life of six years (MACRS 5-year recovery period) at which time t will be sold for $4,500. Mary uses a 15% after-tax MAR and the van would be depreciated using MACRS. Should Mary purchase the van on an after-tax basis? Mary uses a 40% tax rate. Determine the depreciation schedule for straight line, 150% declining balance, and MACRS depreciation methods. (10 points) a b. Using your MACRS depreciation values and the information above, determine if the van should be purchased on an after tax basis. (20 points) EOY Straight Line Depreciation150% DB Depreciation MACRS Depreciation 2 EOY CFBT TI CFAT ax 0Explanation / Answer
EOY SLM 150% DB Depn MACRS Depn 1 6750 10,125 9,000 2 6750 7,594 14,400 3 6750 5,695 8,640 4 6750 4,271 5,184 5 6750 3,204 5,184 6 6750 2,403 2,592 Calculation of 150% DB method Net of salvage 0 40500 1 10,125 30375 2 7,594 22781 3 5,695 17086 4 4,271 12814 5 3,204 9611 6 2,403 7208 depreciation percentage in DB method: 25% (150%/6) Year Recovery period Depn Book Valoue 5-year Rate 0 45,000 1 20.00% 9,000 36,000 2 32.00% 14,400 21,600 3 19.20% 8,640 12,960 4 11.52% 5,184 7,776 5 11.52% 5,184 2,592 6 5.76% 2,592 - 1/(1+.15)^n EOY Capital flow CFBT d TI Tax CFAT Dis Fac PV 0 -45000 -45,000 1 -45,000 1 25,000 9,000 16,000 6,400 18,600 0.869565 16,174 2 25,000 14,400 10,600 4,240 20,760 0.756144 15,698 3 25,000 8,640 16,360 6,544 18,456 0.657516 12,135 4 25,000 5,184 19,816 7,926 17,074 0.571753 9,762 5 25,000 5,184 19,816 7,926 17,074 0.497177 8,489 6 2700 25,000 2,592 22,408 8,963 18,737 0.432328 8,100 NPV 25,357 As NPV is >0 so marry should buy the van Salvage value before tax 4,500 Tax at 40% 1,800 Salvage value after tax 2,700