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    Spending down a growing sum, Declining balance depreciation

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    1.Return to the Diversified Electronics case covered in class. (file attached)
    Suppose the annual lease payment is revised to $180,000. Then, relative to the alternative of buying the equipment, the after-tax cash inflows to Diversified are
    A.greater when the equipment is purchased.
    B.greater when the equipment is leased.
    C.cannot be determined from the information given.

    2.Return to the spreadsheet discussed in class on capital budgeting with taxes. (file attatched)

    If the depreciation allowed for tax purposes is changed from straight line to 200% declining balance using tax rules described in class and no other facts are changed, then the revised net present value is:

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    Solution Preview

    Facts Straight line+Bonus
    Original cost of depreciable asset $1,200
    Nominal pre-tax rate of return 15.00%
    Income tax rate 40.00%
    Nominal after-tax rate of return 9.00%
    Accelerated depreciation rate 100%
    Asset life in years 5

    Time period in years 0 1 2 3 4 5
    Basis at the start of the year $1,200 $960 $720 $480 $240
    Bonus depreciation $0
    Tax depreciation ($240) ($240) ($240) ($240) ($240)
    Basis at the end of the year $960 $720 $480 $240 $0

    Tax return
    Revenue $1,100 $1,100 $1,100 $1,100 $1,100
    Variable ...

    Solution Summary

    The expert examines spending down a growing sun for declining balance depreciation.