[Anonymous]

Im confused as to why the income tax rate would be included in the calculation for the provided answer. Thanks for your help.

The following selected data pertain to a 4-year project being considered by Metro Industries:

A depreciable asset that costs $1,200,000 will be acquired on January 1, 20X1. The asset, which is expected to have a $200,000 salvage value at the end of four years, qualifies as 3-year property under the modified accelerated cost recovery system (MACRS).

The new asset will replace an existing asset that has a tax basis of $150,000 and can be sold January 1, 20X1, for $180,000.

The project is expected to provide added annual sales of 30,000 units at $20 each. Additional cash operating costs are variable, $12 per unit; fixed, $90,000 per year.

A $50,000 working capital investment that is fully recoverable at the end of the fourth year is required.

Metro is subject to a 40% income tax rate and rounds all computations to the nearest dollar. Assume that any gain or loss affects the taxes paid at the end of the year in which it occurred. The company uses the net present value method to analyze investments and will employ the following factors and rates.

Present Value Present Value of MACRS

Period of $1 at 12% $1 Annuity at 12% Rate

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1 0.8929 0.8929 .33

2 0.7972 1.6901 .45

3 0.7118 2.4018 .15

4 0.6355 3.0373 .07

The discounted cash flow for 20X4 MACRS depreciation on the new asset is:

A.

$17,920.

B.

$21,353.

C.

$26,880.

D.

$32,256.

ANSWER:

You did not answer the question. The correct answer is B.

Discounted cash Cost of MACRS Income Present value

flow for 20X4 = new x rate for x tax x factor for

MACRS depreciation asset Period 4 rate Period 4 at 12%

= $1,200,000 x .07 x .40 x .6355

= $21,353