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BEC - Business Environment & Concepts (Forum Locked Forum Locked)
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bala
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Posted: 18 Feb 2009 at 23:50 | IP Logged  

Kore Industries is analyzing a capital investment proposal for new equipment to produce a product over the next eight years.  The analyst is attempting to determine the appropriate "end-of-life" cash flows for the analysis.  At the end of eight years, the equipment must be removed from the plant and will have a net book value of zero, a tax basis of $75,000, a cost to remove of $40,000, and scrap salvage value of $10,000.  Kore's effective tax rate is 40 percent.  What is the appropriate "end-of-life" cash flow related to these items that should be used in the analysis?

ans is $12000 can someone plz explain how?
Thanks!


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bala
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Posted: 19 Feb 2009 at 01:16 | IP Logged  

The use of an accelerated method instead of the straight-line method of depreciation in computing the net present value of a project has the effect of increasing the present value of the depreciation tax shield.

my question is will the total depreciation amount be the same under acclerated  and straight-line method?
plz help.
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SATYA
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Posted: 19 Feb 2009 at 13:03 | IP Logged  

my opinion is there should be a difference in the depreciation amt. since the depn rate is presumed to be constant in this question , so the increase the tax sheid should b done only by the increase in the depreciation amount charged .

so there will surely be a depn amount change when u shift from staright line to accelarated.



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arushi_13
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Posted: 19 Feb 2009 at 13:14 | IP Logged  

In my opinion the TOTAL depreciation over the asset life under both SL and Accelerated methods is the SAME. The only difference is that in the initial years the depreciation expense is more when we use Accelerated methods rather than when we use SL. Since the depreciation expense is more when using accelerated depreciation method(s) the depreciation tax shield is more and thus NPV is more as there will be more cash inflow
(indirect cash flow resulting from increased tax savings.)


Edited by arushi_13 on 19 Feb 2009 at 13:17


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bala
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Posted: 19 Feb 2009 at 13:27 | IP Logged  

Thank you so much Satya & Arushi for helping out! really appreciate it!
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