An owner of a large ranch is considering the purchase of a tractor with a front-end loader to clean his corrals instead of hiring workers that do it with a pitch fork. He has given you the following information and has asked you to evaluate this invest

Question

admin

18.07.2022 - 08:48

An owner of a large ranch is considering the purchase of a tractor with a front-end loader to clean his corrals instead of hiring workers that do it with a pitch fork. He has given you the following information and has asked you to evaluate this invest

Question:

An owner of a large ranch is considering the purchase of a tractor with a front-end loader to clean his corrals instead of hiring workers that do it with a pitch fork. He has given you the following information and has asked you to evaluate this investment. The equipment costs $40,000. The rancher expects that he will save $11,500 a year that is usually paid to workers that clean out the corral by hand.

However, he will incur an additional cost of $1,000 for fuel, repairs and maintenance. The rancher plans on keeping the equipment for 3 years before replacing it with a new one. He thinks he can sell the old equipment for $25,000 in three years. The rancher anticipates that his marginal tax rate will be 20 percent over the next three years. The IRS will allow the rancher to depreciate the tractor over seven years using the straight-line method. The rancher requires at least a 15% pretax rate of return on capital (pretax).

What is the present value tax savings from depreciation?

Answers (0)

Sondra April 10, 2023 в 11:49

The present value tax savings from depreciation is $2,940. To calculate this, first find the annual depreciation expense: $40,000 / 7 = $5,714.29 Next, calculate the tax savings from depreciation each year: $5,714.29 ? 20% = $1,142.86 Since the rancher plans on keeping the equipment for 3 years and the IRS allows depreciation over 7 years, the tax savings from depreciation for each of the 3 years will be the same: $1,142.86 ? 3 = $3,428.57 To find the present value of these tax savings, you need to discount them back to their present value using the rancher's required pretax rate of return of 15%. The formula to do this is: Present value = Future value / (1 + r)^t Where r is the required rate of return (15%) and t is the number of years. Plugging in the values: Present value = $3,428.57 / (1 + 0.15)^3 = $2,940 Therefore, the present value tax savings from depreciation is $2,940.

Do you know the answer?

Leave a comment Cancel Response

Not sure about the answer?

Find the right answer to the question An owner of a large ranch is considering the purchase of a tractor with a front-end loader to clean his corrals instead of hiring workers that do it with a pitch fork. He has given you the following information and has asked you to evaluate this invest by subject Business, and if there is no answer or no one has given the right answer, then use the search and try to find the answer among similar questions.

Search for other answers

New questions in the category: Business

Calculate the Debt Ratio given that Total Assets is $1620 and Total Owners’ Equity is $1035. a. 36.11% b. 36.56% c. 37.03% d. 37.4%

Answers (0)

A tank of capacity 200 gallons holds 100 gallons of water with 25 pounds of sugar in solution. Pure water is poured into it at a rate of 2 gallons per minute, and the well stirred mixture flows out of this tank at a rate of

Answers (0)

List the basic steps in the recording process.

Answers (1)

Do independent contractors get overtime pay?

Answers (1)

Briefly distinguish between financial and managerial accounting as they relate to (i) the primary users, (ii) the type and frequency of reports, (iii) the purpose of reports, and (iv) the content of reports.

Answers (0)