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    Depreciation and Net Present Value Problems

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    1. You are thinking of opening an internet coffee shop and estimate the following cash flows. The cost of the establishment is $320,000 for the building and $185,000 for equipment (tax life of 5 years) and both are placed it into service on January 1. The business will earn $18,000 per week in revenue and have cash expenses of $7,000 per week during its eight years of operation. Assume a 50-week year. The building and equipment will be sold for an after tax cash disposition value of $200,000 at the end of the 8th year. No other cash flows will occur during the 8 years of operation. Using a 23 percent tax rate, and a 7 percent cost of money, what is the net present value of this business?

    Net present value______________________

    2. Myles Corporation is considering a new computer system (equipment) that can be purchased for $143,000. Delivery will cost $8,200 and setup will cost $12,000. What is the initial depreciable cost (the amount that can be depreciated not depreciation expense) of the computer system?

    Depreciable cost (not depreciation expense -- you may want to refer to the text)______________________

    3. Mason James Corporation expects to install a $82,000 machine in 2011 and another $101,000 machine in 2012. The first machine has a 7-year tax life and the second machine has a 3-year tax life. What is the total expected depreciation expense for these two machines in 2013?

    Total depreciation expense for both machines in 2013______________________

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    Solution Preview

    Please see the attached Excel 97-2003 spreadsheet.

    1. You are thinking of opening an internet coffee shop and estimate the following cash flows. The cost of the establishment is $320,000 for the building and $185,000 for equipment (tax life of 5 years) and both are placed it into service on January 1.
    The business will earn $18,000 per week in revenue and have cash expenses of $7,000 per week during its eight years of operation. Assume a 50-week year. The building and equipment will be sold for an after tax cash disposition value of $200,000
    at the end of the 8th year. No other cash flows will occur during the 8 years of operation. Using a 23 percent tax rate, and a 7 percent cost of money, what is the net present value of this ...

    Solution Summary

    This solution illustrates (a) how to compute the net present value of a business, (b) how to determine the depreciable basis of property, and (c) how to compute MACRS depreciation on property in one year during its recovery period.

    $2.19