Which is better for the company to use soyd depreciation

Question

Assignment:

Carlisle company is in need of new production line equipment that will increase the throughput and allow them to meet anticipated demand for the next 10 years. This equipment is the H5500 Robotics platform which has proven to be highly reliable when installed at the company's other divisions. The shipping costs, sales tax, installation cost for the H5500 will be $120,000. The equipment itself will cost $380,000. The operating and maintenance costs for the equipment is anticipated to be $30,000 per year escalating at the rate of inflation of 3% per year. The company's tax rate is 30%. If the annual receipts are as shown in the table below and using a straight line depreciation what is the company's anticipated before and after tax profit per year. Note, the salvage value of the equipment is expected to be $50000 at the end of the 10^th year.

EOY	Annual Receipts
0	0
1	$200,000.00
2	$250,000.00
3	$300,000.00
4	$300,000.00
5	$300,000.00
6	$350,000.00
7	$400,000.00
8	$350,000.00
9	$200,000.00
10	$150,000.00

 

 

 

 

 

 

 

 

If the company's MARR is 15% Is this a viable project?

Total Receipts & Disbursements Before Taxes

EOY	Investments	Annual Receipts	Annual O&M
0	-$500,000.00	$0.00
1		$200,000.00	-$30,000.00
2		$250,000.00	-$30,900.00
3		$300,000.00	-$31,827.00
4		$300,000.00	-$32,781.81
5		$300,000.00	-$33,765.26
6		$350,000.00	-$34,778.22
7		$400,000.00	-$35,821.57
8		$350,000.00	-$36,896.22
9		$200,000.00	-$38,003.10
10	$50,000.00	$150,000.00	-$39,143.20

Have I identified all my cash flows now to determine my net cash flow (NCF)?

Total Receipts & Disbursements Before Taxes w/Depreciation

The depreciable amount is: $500,000 - $50,000 = $450,000

Useful Life is 10 Years

Depreciation per year: $450,000/10 = $45,000

EOY	Investments	Annual Receipts	Annual O&M	Annual Depreciation
0	-$500,000.00	$0.00	$0.00	$0.00
1		$200,000.00	-$30,000.00	-$45,000.00
2		$250,000.00	-$30,900.00	-$45,000.00
3		$300,000.00	-$31,827.00	-$45,000.00
4		$300,000.00	-$32,781.81	-$45,000.00
5		$300,000.00	-$33,765.26	-$45,000.00
6		$350,000.00	-$34,778.22	-$45,000.00
7		$400,000.00	-$35,821.57	-$45,000.00
8		$350,000.00	-$36,896.22	-$45,000.00
9		$200,000.00	-$38,003.10	-$45,000.00
10	$50,000.00	$150,000.00	-$39,143.20	-$45,000.00

Total Receipts & Disbursements Before Taxes Net Cash Flow (NCF)

EOY	Investments	Annual Receipts	Annual O&M	Annual Depreciation	Before Tax NCF
0	-$500,000.00	$0.00	$0.00	$0.00	-$500,000.00
1		$200,000.00	-$30,000.00	-$45,000.00	$125,000.00
2		$250,000.00	-$30,900.00	-$45,000.00	$174,100.00
3		$300,000.00	-$31,827.00	-$45,000.00	$223,173.00
4		$300,000.00	-$32,781.81	-$45,000.00	$222,218.19
5		$300,000.00	-$33,765.26	-$45,000.00	$221,234.74
6		$350,000.00	-$34,778.22	-$45,000.00	$270,221.78
7		$400,000.00	-$35,821.57	-$45,000.00	$319,178.43
8		$350,000.00	-$36,896.22	-$45,000.00	$268,103.78
9		$200,000.00	-$38,003.10	-$45,000.00	$116,996.90
10	$50,000.00	$150,000.00	-$39,143.20	-$45,000.00	$115,856.80

EOY	Investments	Annual Receipts	Annual O&M	Annual Depreciation	Before Tax NCF	Taxes	After Tax NCF
0	-$500,000.00	$0.00	$0.00	$0.00	-$500,000.00	$0.00	-$500,000.00
1		$200,000.00	-$30,000.00	-$45,000.00	$125,000.00	-$37,500.00	$87,500.00
2		$250,000.00	-$30,900.00	-$45,000.00	$174,100.00	-$52,230.00	$121,870.00
3		$300,000.00	-$31,827.00	-$45,000.00	$223,173.00	-$66,951.90	$156,221.10
4		$300,000.00	-$32,781.81	-$45,000.00	$222,218.19	-$66,665.46	$155,552.73
5		$300,000.00	-$33,765.26	-$45,000.00	$221,234.74	-$66,370.42	$154,864.31
6		$350,000.00	-$34,778.22	-$45,000.00	$270,221.78	-$81,066.53	$189,155.24
7		$400,000.00	-$35,821.57	-$45,000.00	$319,178.43	-$95,753.53	$223,424.90
8		$350,000.00	-$36,896.22	-$45,000.00	$268,103.78	-$80,431.14	$187,672.65
9		$200,000.00	-$38,003.10	-$45,000.00	$116,996.90	-$35,099.07	$81,897.83
10	$50,000.00	$150,000.00	-$39,143.20	-$45,000.00	$115,856.80	-$34,757.04	$81,099.76

 

 

 

 

 

 

 

 

1.Given the Before Tax NCF is in column I - Using Excel:  IRR = IRR(I2:I12) = 36%

2.Given the After Tax NCF is in column k - Using Excel:   IRR = IRR(k2:k12) = 24%

Given MARR = 15%, this is an acceptable project since the company's after tax IRR is 24%

Repeat the above analysis using a SOYD Depreciation and the following additional information

The Carlisle company in addition to the previous information supplied has applied for and received a tax credit of $15,000 for year 1. It is expected to be the same for each of the remaining 9 years. Note: you will need to research as to what is a tax credit and how is it used.

If the Carlisle Company used a SOYD Depreciation what is the

1.Before Tax Net Cash Flow?

2.After Tax Net Cash Flow?

3.After Tax Rate of Return?

4.Discuss these results and compare to the previous analysis:

1.What is different?

2.Which is better for the company to use, Straight Line or SOYD depreciation?

5.In your conclusions discuss the ramification on the IRR that depreciation and tax credits have.