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.