Chapter 9 - Calculating Depreciation PDF

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Calculating Depreciation...

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11/25/2017

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16/16

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100

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1.

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Award: 3.20 out of 3.20 points

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Problem 9-5 Calculating Depreciation [L [LO O 2]

A piece of newly purchased industrial equipment costs $1,000,000 and is classified as seven-year property under MACRS. The MACRS depreciation schedule is shown in the MACRS Table. Calculate the annual depreciation allowances and end-of-the-year book values for this equipment. (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32. Leave no cells blank. Enter "0" when necessary.) Beginning Book Value $ 1,000,000 857,100 612,200 437,300 312,400 223,100 133,900 44,600

Year 1 2 3 4 5 6 7 8

Depreciation Allowance $ 142,900 244,900 174,900 124,900 89,300 89,200 89,300 44,600

Ending Book Value $ 857,100 612,200 437,300 312,400 223,100 133,900 44,600 0

 References Worksheet

Learning Objective: 09-02 Analyze a projects projected cash flows.

Problem 9-5 Calculating Depreciation [LO 2]

Section: 9.4 More on Project Cash Flow

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Problem 9-5 Calculating Depreciation [L [LO O 2] A piece of newly purchased industrial equipment costs $1,000,000 and is classified as seven-year property under MACRS. The MACRS depreciation schedule is shown in the MACRS Table. Calculate the annual depreciation allowances and end-of-the-year book values for this equipment. (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32. Leave no cells blank. Enter "0" when necessary.) Year

Beginning

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Depreciation

Ending Book 2/11

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1

$

2 3 4 5

Book Value 1,000,000 ± .01% 857,100 ± .1% 612,200 ± .1% 437,300 ± .1%

312,400 ± .1% 223,100 ± .1% 133,900 ± .1% 44,600 ± .1%

6 7 8

$

Allowance 142,900 ± .1% 244,900 ± .1% 174,900 ± .1% 124,900 ± .1%

$

89,300 ± .1% 89,200 ± .1% 89,300 ± .1% 44,600 ± .1%

Value 857,100 ± .1% 612,200 ± .1% 437,300 ± .1% 312,400 ± .1%

223,100 ± .1% 133,900 ± .1% 44,600 ± .1% 0

 Explanation: The ending book value for any year is the beginning book value minus the depreciation for the year. Remember, to find the amount of depreciation for any year, you multiply the purchase price of the asset times the MACRS percentage for the year. The depreciation schedule for this asset is: Year 1 2 3 4 5 6 7 8

Beginning Book Value $1,000,000 857,100 612,200 437,300 312,400 223,100 133,900 44,600

Depreciation 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46%

Depreciation Allowance $142,900 244,900 174,900 124,900 89,300 89,200 89,300 44,600

Ending Book Value $857,100 612,200 437,300 312,400 223,100 133,900 44,600 0

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2.

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Award: 3.20 out of 3.20 points

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Problem 9-3 Calculating Projected Net Income [L [LO O 2]

A proposed new investment has projected sales of $844,000. Variable costs are 53 percent of sales, and fixed costs are $188,080; depreciation is $100,500. Assume a tax rate of 30 percent. What is the projected net income? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Net income

$ 75,670

 References Worksheet

Learning Objective: 09-02 Analyze a projects projected cash flows.

Problem 9-3 Calculating Projected Net Income [LO 2]

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

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Problem 9-3 Calculating Projected Net Income [L [LO O 2] A proposed new investment has projected sales of $844,000. Variable costs are 53 percent of sales, and fixed costs are $188,080; depreciation is $100,500. Assume a tax rate of 30 percent. What is the projected net income? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Net income

$

75,670 ± .1%

 Explanation: We need to construct an income statement. The income statement is: Sales Variable costs Fixed costs Depreciation http://ezto.mheducation.com/hm.tpx?todo=printview

$844,000 447,320 188,080 100,500 4/11

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EBIT Taxes @ 30% Net income

$108,100 32,430 $ 75,670

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5/11

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3.

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Award: 3.20 out of 3.20 points

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Problem 9-8 Calculating Project OCF [L [LO O 2]

Rolston Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $27,300, and the company expects to sell 1,580 per year. The company currently sells 2,080 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,900 units per year. The old board retails for $23,200. Variable costs are 54 percent of sales, depreciation on the equipment to produce the new board will be $1,530,000 per year, and fixed costs are $1,430,000 per year. If the tax rate is 34 percent, what is the annual OCF for the project? (Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.) OCF

$ 11,404,049

 References Worksheet

Learning Objective: 09-02 Analyze a projects projected cash flows.

Problem 9-8 Calculating Project OCF [LO 2]

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

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Problem 9-8 Calculating Project OCF [L [LO O 2] Rolston Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $27,300, and the company expects to sell 1,580 per year. The company currently sells 2,080 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,900 units per year. The old board retails for $23,200. Variable costs are 54 percent of sales, depreciation on the equipment to produce the new board will be $1,530,000 per year, and fixed costs are $1,430,000 per year. If the tax rate is 34 percent, what is the annual OCF for the project? (Do not round intermediate calculations and round your answer to the nearest whole dollar amount, e.g., 32.) OCF

$

11,404,049 ± .01%

 Explanation: http://ezto.mheducation.com/hm.tpx?todo=printview

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We need to calculate the OCF, so we need an income statement. The lost sales of the current sound board sold by the company will be a negative since it will lose the sales. Sales of new Lost sales of old Variable costs Fixed costs Depreciation EBIT Tax Net income

$43,134,000 –4,176,000 21,037,320 1,430,000 1,530,000 $14,960,680 5,086,631 $ 9,874,049

The OCF for the company is: OCF = EBIT + Depreciation – Taxes OCF = $14,960,680 + 1,530,000 – 5,086,631 OCF = $11,404,049 

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Award: 3.20 out of 3.20 points

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Problem 9-1 R Relevant elevant Cash Flows [L [LO O 1]

Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $7.8 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent facilities elsewhere. The land would net $10.6 million if it were sold today. The company now wants to build its new manufacturing plant on this land; the plant will cost $21.8 million to build, and the site requires $930,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Cash flow

$ 33,330,000

 References Worksheet

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Problem 9-1 Relevant Cash Flows [LO 1]

Section: 9.2 Incremental Cash Flows

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Problem 9-1 R Relevant elevant Cash Flows [L [LO O 1] Kenny, Inc., is looking at setting up a new manufacturing plant in South Park. The company bought some land six years ago for $7.8 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent facilities elsewhere. The land would net $10.6 million if it were sold today. The company now wants to build its new manufacturing plant on this land; the plant will cost $21.8 million to build, and the site requires $930,000 worth of grading before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Cash flow

$

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33,330,000 ± .01%

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 Explanation: The $7.8 million acquisition cost of the land six years ago is a sunk cost. The $10.6 million current aftertax value of the land is an opportunity cost if the land is used rather than sold off. The $21.8 million cash outlay and $930,000 grading expenses are the initial fixed asset investments needed to get the project going. Therefore, the proper Year 0 cash flow to use in evaluating this project is: Cash flow = $10,600,000 + 21,800,000 + 930,000 Cash flow = $33,330,000 

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Award: 3.20 out of 3.20 points

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Problem 9-4 Calculating OCF [L [LO O 2]

Fill in the missing numbers in the following income statement: (Do not round intermediate calculations and round your answers to the nearest whole number, e.g. 32.) Sales Costs Depreciation EBIT Taxes (30%)

$

$ $

Net income

643,900 345,400 96,100 202,400 60,720 141,680

What is the OCF? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g. 32.) OCF

$ 237,780

What is the depreciation tax shield? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g. 32.) Depreciation tax shield

$ 28,830

 References Worksheet

Learning Objective: 09-02 Analyze a projects projected cash flows.

Problem 9-4 Calculating OCF [LO 2]

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

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Problem 9-4 Calculating OCF [L [LO O 2] Fill in the missing numbers in the following income statement: (Do not round intermediate calculations and round your answers to the nearest whole number, e.g. 32.) Sales http://ezto.mheducation.com/hm.tpx?todo=printview

$

643,900 10/11

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Costs Depreciation EBIT

345,400 96,100 202,400 ± .1% 60,720 ± .1%

$

Taxes (30%)

141,680 ± .1%

$

Net income

What is the OCF? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g. 32.) OCF

$

237,780 ± .1%

What is the depreciation tax shield? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g. 32.) Depreciation tax shield

$

28,830 ± .1%

 Explanation: To find the OCF, we need to complete the income statement as follows: Sales Variable costs Depreciation EBIT Taxes@30% Net income

$643,900 345,400 96,100 $202,400 60,720 $141,680

The OCF for the company is: OCF = EBIT + Depreciation – Taxes OCF = $202,400 + 96,100 – 60,720 OCF = $237,780 The depreciation tax shield is the depreciation times the tax rate, so: Depreciation tax shield = Depreciation(TC) Depreciation tax shield = .30($96,100) Depreciation tax shield = $28,830 The depreciation tax shield shows us the increase in OCF by being able to expense depreciation. 

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