2D2B FRED KRATZ JUST COMPLETED A CAPITAL INVESTMENT ANALYSIS FOR THE...
318.
CSO: 2D2a
LOS: 2D2b
Fred Kratz just completed a capital investment analysis for the acquisition of new
material handling equipment. The equipment is expected to cost $1,000,000 and be used
for eight years. Kratz reviewed the net present value (NPV) analysis with Bill Dolan,
Vice President of Finance. The analysis shows that the tax shield for this investment has
a positive NPV of $200,000, using the firm’s hurdle rate of 20%. Dolan noticed that 8
year straight-line depreciation was used for tax purposes but, since this equipment
qualifies for 3-year MACRS treatment, the tax shield analysis should be revised. The
company has an effective tax rate of 40%. The MACRS rates for 3-year property are as
follows.
Year
Rate
1
33.33%
2
44.45%
3
14.81%
4
7.41%
Accordingly, the revised NPV for the tax shield (rounded to the nearest thousand) should
be
a.
$109,000.
b.
$192,000.
c.
$283,000.
d.
$425,000.