CAN Company invested $120,000 on an asset with the depreciable life of 6 years. They can earn $36,000 per year from

Question

CAN Company invested $120,000 on an asset with the depreciable life of 6 years. They can earn $36,000 per year from this investment for 6 years. Asset has a negligible or zero MV at the end of its useful life. No other expense can be deducted for this asset Published income tax rate is 20% on annual taxable income. Use after-tax MARR of 15% per year, and straight line depreciation method. a) Net Income Before Tax? b) Net Income After Tax? c) After Tax Cash Flow? d) Is it profitable investment after taxes?

Help In Homework · Accepted Answer

a) Net income before tax: $ Annual earnings 36000 Less:Depreciation (120000/6) 20000 Net income before tax 16000 b) Net income after tax: $ Net income before tax 16000 Less:Tax at 20% 3200 Net income after tax 12800 c) After tax cash flow: $ Net income after tax 12800 Add:Depreciation 20000 After tax cash flow 32800 d) Net present value=Present value of after tax cash flow-Initial investment Present value of after tax cash flow=After tax cash flow*PV of $1 at 15% for 6 years=32800*3.78448=$ 124130 Net present value=124130-120000=$ 4130 It is a profitable investment since net present value is positive

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CAN Company invested $120,000 on an asset with the depreciable life of 6 years

Expert Solution

Archived Solution

a)	Net income before tax:
			$
	Annual earnings		36000
	Less:Depreciation	(120000/6)	20000
	Net income before tax		16000

b)	Net income after tax:
			$
	Net income before tax		16000
	Less:Tax at 20%		3200
	Net income after tax		12800

c)	After tax cash flow:
			$
	Net income after tax		12800
	Add:Depreciation		20000
	After tax cash flow		32800

d)	Net present value=Present value of after tax cash flow-Initial investment
	Present value of after tax cash flow=After tax cash flowPV of $1 at 15% for 6 years=328003.78448=$ 124130
	Net present value=124130-120000=$ 4130
	It is a profitable investment since net present value is positive