t ul le asset Make a 1613 A new asset is available for 15000

t ul le asset. Make a 16.13. A new asset is available for $150,000. Depreciation would be SL with the half-year convention, in the 8-year property class. O&M; costs are $15,000 each year for the first 5 years, $18,000 in year 6, $21,000 in year 7, $24,000 in year 8, etc. Salvage values are estimated to be $131,250 after 1 year, $113,750 after 2 years, $97500 after 3 years (SOD pattern with N = 15). With a marginal tax rate of 45% and sipion ab MARR = 12%, find the economic life of the asset

Solution

Calculation of cash flow for 1 year

A) calculation of depreciation for every year

= $ 150000/16= $9375

= $9375×2. = $18750

Cash out flow 1- 5 year

Operating expenses. $ 15000

Add. Depreciation $ 18750

Total cash out flow. $ 33750

Tax (45%). $15187.5

Profit after tax ($18562.5)

Add deprecation. $ 18750

Net cash inflow. $187.5

Net cash out flow 6 year

Operating expenses. $ 18000

Add. Depreciation. $ 18750

Total loss. $ 36750

Tax (45%). $16537.5

Loss after tax ($20212.5)

Add. Depreciation. $18750

Cash out flow. $1462.5

Net cash outflow 7 year

Operating expenses. $21000

Add. Depreciation. $18750

Total loss $ 39750

Tax (45%). $ 17887.5

Loss after tax. $ 21862.5

Add deprecation. $ 18750

Cash outflow. $ 3112.5

Net cash out flow of 8 year

Operating expenses. $ 24000

Add. Depreciation. $18750

Total loss. $42750

Tax (45%). $ 19237.5

Loss after tax. $ 23512.5

Add. Depreciation. $ 18750

Net cash outflow. $4762.5

Calculation of economic life of assets

Net PV of 1 year

Cash in flow. = $187.5×.893 + $131250×.893 = $117373.69

Cash out flow =. = $150000

Net PV. =. =- $32626.31

Net PV of 2 year

Cash inflow. = $187.5×1.69+$113750×.797 = $90975.63

Cash outflow. =. = -$150000

Net PV. = -$59021.37

Net PV cash flow after 5 year

Cash in flow =. $187.5×3.605+$97500×.567 =.$55958.44

Cash outflow =. = -$150000

Net PV. = -$ 94041.5

Net PV of 6 year

Cash inflow

=$675.94-$1462.5×.507+$97500×.507=$49365.95

Cash outflow. = -$150000

Net PV=. = -$100634.05

Net PV of 7 year

Cash in flow = $675.94-$741.49-$3112.5×.452+$97500×.452

= $42597.6

Cash outflow = -$150000

Net PV =. = -$107402.4

Net PV of 8 year

Cash in flow = $675.94-$741.49-$1406.85+$97500×.404-$4762×.404

=$35993.55

Cash outflow =-$150000

Net PV =. -$114006.45

Heanc economic life of assets will be 1 year.