A subsidiary of AEP places in service electric generating and transmission equipment at a cost of $3,000,000. It is expected to last 30 years with a salvage value of $250,000. The equipment will increase net income by $500,000 in the first year, increasing by 2.4% each year thereafter. The subsidiary’s tax rate is 25% and the after-tax MARR is 9%. There is some concern that the need for this equipment will last only 10 years and will need to be sold off for $550,000 at that time. Develop tables using a spreadsheet to determine the ATCF for each year and the after-tax PW, AW, IRR, and ERR after only 10 years to see if the venture would be worth while economically. Comment on the percentage differences in PWAT for these three analyses - Use MACRS-GDS(20) alone, b. Use MACRS-GDS(20) with 50% bonus depreciation. c. Use MACRS-GDS(20) with 100% bonus depreciation.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter9: Capital Budgeting And Cash Flow Analysis
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A subsidiary of AEP places in service electric generating and transmission equipment at a cost of $3,000,000. It is expected to last 30 years with a salvage value of $250,000. The equipment will increase net income by $500,000 in the first year, increasing by 2.4% each year thereafter. The subsidiary’s tax rate is 25% and the after-tax MARR is 9%. There is some concern that the need for this equipment will last only 10 years and will need to be sold off for $550,000 at that time. Develop tables using a spreadsheet to determine the ATCF for each year and the after-tax PW, AW, IRR, and ERR after only 10 years to see if the venture would be worth while economically. Comment on the percentage differences in PWAT for these three analyses - Use MACRS-GDS(20) alone, b. Use MACRS-GDS(20) with 50% bonus depreciation. c. Use MACRS-GDS(20) with 100% bonus depreciation.

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