(9.19) The Vermont Construction Company purchased a hauling truck on January 1, 2009 at a cost of $35,000. The truck has a useful life of eight years with an estimated salvage value of $6,000. The straight-line method is used for book purposes. For tax purposes, the truck would be depreciated with the MACRS method over its five-year class life. Determine the annual depreciation amount to be taken over the useful life of the hauling truck for both book and tax purposes.
(10.2) An automobile-manufacturing company is considering purchasing an industrial robot to do spot welding, which is currently done by skilled labor. The initial cost of the robot is $210,000, and the annual labor savings are projected to be $150,000. If purchased, the robot will be depreciated under MACRS as a five-year recovery property. The robot will be used for seven years, at the end of which time, the firm expects to sell it for $60,000. The company’s marginal tax rate is 35% over the project period. Determine the net after-tax cash flows for each period over the project life. Assume MARR = 15%.
(10.33) Tom Hagstrom needs a new car for his business. One alternative is to purchase the car outright for $28,000 and to finance the car with a bank loan for the net purchase price. The bank loan calls for 36 equal monthly payments of $881.30 at an interest rate of 8.3% compounded monthly. Payments must be made at the end of each month. The terms of each alternative are
Buy Lease
$28,000 $696 per month 36-month
open-end lease.
Annual mileage
allowed = 15,000 miles
If Tom takes the lease option, he is required to pay $500 for a security deposit, which is refundable at the end of the lease, and $696 a month at the beginning of each month for 36 months. If the car is purchased, it will be depreciated according to a five-year MACRS property classification. The car has a salvage value of $15,400, which is the expected market value after three years, at which time Tom plans to replace the car, irrespective of whether he leases or buys. Tom’s marginal tax rate is 28%. His MARR is known to be 13% per year.
(a) Determine the annual cash flows for each option.
(b) Which option is better?
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