Flotilla Beam, the owner of the Bay City Boatyard, recently had a brilliant idea. There is a shortage of boat slips in the harbor during the summer. Beam’s idea is to develop a system of “dry slips.” A dry slip is a large storage rack in a warehouse on which a boat is stored. When the boat owner requests, a forklift is used to remove the boat from the dry slip and place the boat in the water. The entire operation requires one hour when a launch reservation is made in advance. The boatyard already has a vacant warehouse, which could be used for this purpose. However, Beam’s idea will require the following capital investment by the boatyard. • Storage racks: cost, $200,000; useful life, 18 years; MACRS class, 10-year property. • Forklift: cost, $120,000; useful life, six years; MACRS class, 5-year property. Bay City Boatyard’s tax rate is 35 percent, and its after-tax hurdle rate is 14 percent. Instructions: For each of the boatyard’s proposed capital investments: 1. Prepare a schedule of the annual depreciation expenses for tax purposes. 2. Compute the present value of the depreciation tax shield.
Flotilla Beam, the owner of the Bay City Boatyard, recently had a brilliant idea. There is a shortage of boat slips in the harbor during the summer. Beam’s idea is to develop a system of “dry slips.” A dry slip is a large storage rack in a warehouse on which a boat is stored. When the boat owner requests, a forklift is used to remove the boat from the dry slip and place the boat in the water. The entire operation requires one hour when a launch reservation is made in advance. The boatyard already has a vacant warehouse, which could be used for this purpose. However, Beam’s idea will require the following capital investment by the boatyard.
• Storage racks: cost, $200,000; useful life, 18 years; MACRS class, 10-year property.
• Forklift: cost, $120,000; useful life, six years; MACRS class, 5-year property.
Bay City Boatyard’s tax rate is 35 percent, and its after-tax hurdle rate is 14 percent.
Instructions: For each of the boatyard’s proposed capital investments:
1. Prepare a schedule of the annual
2. Compute the present value of the depreciation tax shield.
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