Empire beauty school textbook

Topics: Depreciation and Income Taxes (Chapter 7) Price Changes and Exchange Rates (Chapter 8) Evaluating Projects with the Benefit-Cost Ratio Method (Chapter 10) • • • • • Correct choice of formulae, accurate calculations, appropriate units, well drawn sketches, showing the work and clearly identifying your answers gets full grade for a question. Answer all sub questions (if any) of a problem for full credit for that problem. Identify your answers clearly. Include printed hard copies of solutions that were generated in Excel. Draw sketches where necessary. 1. Try Your Skills 7-D (10 points) Your company purchased office furniture (asset class 00.11) for $100,000 and placed it in service on August 13, 2013. The cost basis for the furniture is $100,000, and it will be depreciated with the GDS using halfyear convention. The expected salvage (market) value of the furniture is $5,000 in 2021. Determine the recovery period for the furniture and its depreciation deductions over the recovery period. (See section 7.4 of the textbook) HINT: Locate recovery period in GDS column of Table 7-2. Then locate MACRS depreciation rates from Table 7-3. Remember that salvage value is ignored in MACRS. 2. Try Your Skills 7-O (10 points) A new municipal refuse collection vehicle can be purchased for $84,000. Its expected useful life is six years, at which time the market value and book value will be zero. Before-tax cash flow (BTCF) will be +$18,000 per year over the six-year life of the vehicle. (See section 7.9 of the textbook) HINT: Refer to Figure 7-5 on page 353 for a template for determining the after-tax cash flow of the vehicle. (a) Use straight-line depreciation, an effective income tax rate of 40% and an aftertax MARR of 12% to determine the present worth of the investment. (b) What is the after-tax internal rate of return? (c) Is this vehicle a sound investment? Explain your answer. 3. Exercise 7-14: (10 points) During its current tax year (year one), a pharmaceutical company purchased a mixing tank that had a fair market price of $120,000. It replaced an older, smaller mixing tank that had a BV of $15,000. Because a special promotion was underway, the old tank was used as a trade-in for the new one, and the cash price (including delivery and installation) was set at $99,500. The MACRS class life for the new mixing tank is 9.5 years. (See section 7.4, 7.3 of textbook) (a) Under the GDS, what is the depreciation deduction in year three? (b) Under the GDS, what is the BV at the end of year four? (c) If 200% DB had been applied to this problem, what would be the cumulative depreciation through the end of year four? 4. Exercise 7-29: (10 points) Your company has just signed a three-year nonrenewable contract with the city of New Orleans for earthmoving work. You are investigating the purchase of heavy construction equipment for this job. The equipment costs $200,000 and qualifies for five-year MACRS depreciation.