I am having a hard time wrapping my mind around these 2 problems concerning DCF and depreciation/tax
1)Garter Company anticipates buying a $250,000 piece of equipment that will cost $20,000 to install, have a nine-year useful life, and generate $90,000 per year in pre tax cash flows. Assuming a 30 percent tax rate, what is the payback period for this investment in years?
3.75
3.47
3.00
4.50
In this one, you add the 20,000 to the 250,000 and divide it by the 9 years and *(1-t) for the tax benefit depreciation. But in this next one you only include the initial investment….
Barclay Corporation invested $600,000 in a capital project, including $40,000 in installation charges. The project had a useful life of 12 years with no salvage value and generated cash flows of $150,000 each year. Assuming a 30% tax rate and straight-line depreciation for tax purposes, Barclay’s after-tax cash flows per year would have been equal to:
$120,000
$150,000
$105,000
$140,000
In this one, you only use the initial investment of 600,000 and divide by 12 rather than adding the 40,000 installation charges.
In both problems there are installation charges. One includes it for depreciation, the other doesn't. Is it because one question asks for the payback period and the other asks for the cash flows? Please help
Passed in 2014
FAR- (5/27) 88
REG- (2/20) 70, Rematch: (7/2)83
BEC- (4/2) 85
AUD- (4/24) 87
Using Becker live classes and online materials
"if you get confused, listen to the music play"
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