Worksheet Assignment # 5

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Washington State University *

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381

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Finance

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Jan 9, 2024

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docx

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WORKSHEET ASSIGNMENT # 5 Depreciation & Capital Budgeting (9 points) Due by Monday, November 13 th , 11:59 pm (PT) Instructions Answer the questions in this worksheet as you attend the lectures. The questions on this worksheet are usually the same questions the class is answering during the lecture, so you will have the opportunity to work along with the lecture during class time. Upload the worksheet on Canvas when you have completed the questions. You will get a full answer sheet to check your working as soon as you upload your worksheet. You can keep this worksheet for yourself and use it to study for the exam or when completing the homework assignments. Grading You will receive full grades so long as you make a genuine attempt to answer the questions. A genuine attempt means that you must demonstrate that you have attended the lectures related to this particular worksheet. Given that the same questions are being answered during the lectures, your responses should reflect what is covered and provided in the lectures. Whenever calculations are required, you must show your working. Points will be deducted if you only give the final answer without showing your working regardless of giving the correct answer. So long as you make a genuine attempt (as explained above), points will not be automatically deducted when some of your responses are incorrect. Think of this as a chance to practice your new knowledge... and have fun! After you submit your worksheet, you will receive the correct answers in an announcement on Canvas. Make sure to compare your responses with the answer sheet to check your understanding of the material. Questions - DEPRECIATION 1. WSU’s athletic department purchased a new van for $30,000. They expect to sell it in 3 years for $4,000. What is the annual depreciation expense and annual tax saving if the marginal tax rate is 10%, when using: a. Straight-line depreciation Year Depreciation Expense Cost Remaining Tax Saving 1 ($30,000- $4,000)/3 $30,000-$8,667 =$21,333 $8,667*10%= $866.70 SPMGT 374 1
=$8,667 2 ($30,000-$4,000) /3 = $8,667 $21,333 - $8,667 = $12,666 $8,667*10%= $866.70 3 ($30,000-$4,000) /3 = $8,667 $12,666 - $8,667 = $3,999 $8,667*10%= $866.70 b. Double declining balance depreciation Year SL% DDB% Depreciatio n Expense Cost Remaining Tax Saving 1 100%/3 = 33.3% 0.33 * 2 = 67% 67% *$26,000 = $17,333.33 $30,000 – $17,333.33 = $12,666.67 $17,333 * 10% = $1,733.30 2 100%/3 = 33.3% 0.33 * 2 = 67% 67% (26,000 – 17,333.33) = $ 5,806.67 $12,666.67 - $5,806.67 = $6,860 $5,807 * 10% = $580.70 3 100%/3 = 33.3% 0.33 * 2 = 67% 67% ($ 26,000 – (17,333.33 + 5,806.67)) = $1,916.20 $6,860 - $1,916.20 = $4,943.80 $580.70 * 10% = $191.60 Questions – CAPITAL BUDGETING 1. Your gym is evaluating a project to install televisions in the workout area. The gym will install 6 televisions that have a sticker price of $200 each. Delivery for 6 televisions is $50. An electrician is required to install them for around $350. What is the initial cost of the project? $200 (6) + $50 +$350= $1600 SPMGT 374 2
2. This year, revenues from gym memberships were $20,000. Memberships have been growing 6% per year, which is expected to continue into the future. However, the new televisions are expected to increase membership growth to 8% per year. Moreover, advertising time will be sold on the televisions for a total $10,000 a year. The televisions can be depreciated using straight-line depreciation for 5 years with no resale value. Use a 21% tax rate. What is the incremental cash flow for the first year of the project? ICF= estimated net earnings with a television $20,000*8%= ($1600+$20,000+$10,000) = $31,600 Estimated net earning without a television $20,000*6%= ($1200+$20,000+$21,200) = $21,200 $31,600-$21,200= $10,400 Depreciation expenses $1,200/5=$240 Tax Benefits $240*21%=$50.40 ICF $10,400+50.40=$10,450.40 3. Project B has an initial cost of $1,000. Incremental cash flows are estimated to be $200 in Year 1 and $300, $400, $500 in subsequent years. Your firm’s maximum acceptable payback period is 3 years. As the finance manager in charge of this project, should you accept it into your department’s capital budget? SPMGT 374 3
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