BTech, LLC, a startup biotechnology company is preparing alternative proposals for producing a new product in an existing building. In the proposal being considered in this question, the building will be renovated and equipped in one year. Production then will start in year 1. MACRS depreciation will be used with depreciation deductions starting in year 1. The renovation will require the purchase and installation of two types of assets labeled "Group 5" and "Group 7" because they can be depreciated using 5 year and 7 year MARCS rates respectively. The Group 5 assets will costs $300,000 and the Group 7 assets will cost $800,000. Table 9.3 on page 448 contains the depreciation rates. The planning time horizon is six years after renovation.
a) Determine the depreciation and book value for each of the two investment groups for each year.
b) Determine the gain/loss for tax purposes if the Group 5 and Group 7 assets are sold at the end of the planning period for a combined $500,000.
The solution determines the depreciation and book value for each of the two investment groups for each year. It also determines the gain/loss for tax purposes if the Group 5 and Group 7 assets are sold at the end of the planning period for a combined $500,000.
Financial Analysis of Investment Purchases
1. Mario just invested 12K into an interest bearing account that yields 11.0% Inflation is 6.6%
a) What is the actual dollar value of Mario's investment be after 9 years
b) What is the inflation-free interest rate (round to the nearest .01 percent)
c) What will the constant dollar value of Mario's investment be after 9 years (using today's dollars as the reference dollar)?
d) Show that the actual dollar value and the constant dollar value of Mario's investment 9 years from now represent the same amount of money
2. XY computers bought an array processor for doing some high powered computational fluid dynamics calculations. The array processors has an acquisition cost of $22,5000, a 5 year useful life and an expected salvage value of $500 Use the format show in table 14.2 to show depreciation year, depreciation amount and book value.
3. Two years later XY Computers bought an even higher powered array processor. This processor has an acquisition cost of $40000 a 10 year useful lie and an expected salvage value of $2,000. Use the format show in table 14.2 to show depreciation year, depreciation amount and book value.
a) Show straight line depreciation
b) Show 150% declining balance depreciation.
c) Show MACRS depreciation.