XYZ company is considering purchasing an asset for $100,000 that has a 5 year useful life and a $20,000 salvage value. Double declining balance (DDB) depreciation will be used. The asset will produce $50,000/year in savings but will cost $10,000/year to operate. The company is subject to a 35% federal income tax rate and a 9% state income tax rate. It uses an after-tax MARR of 20%
1) Compute the combined (federal+state) income tax rate for XYZ company. Usethis rate for computing after tax cash flows.
2) Determine the after tax cash flow for this investment. Make adjustment in the DDB depreciation charges if necessary in any year in light of SV of $20K.
3) Using the after tax rate of return or present worth, determine if this investment is worth.
4) Suppose the company sells the asset as the end of the third year for $30,000. Compute the equipment's final book value in Year 3 and the depreciation recapture.