Finance 01

[Student Name]

[Course Title]

[Instructor]

[Date]

Taxes and Depreciation - Assignment

12-19

In this problem we have calculated the after tax IRR of drilling equipment owned by Shellout Co . using Excel . The investment of 100 ,000 has been depreciated using MACRS and the Pre-Tax Income amount is achieved by deducting the amount of depreciation from the lease payments . Tax rate of 34 percent is applied to the pretax income to arrive at the after tax income and the amount of depreciation is added back to this amount to arrive

at the amount of net cash flows . The book-value of the equipment is calculated by deducting the accumulated depreciation from the cost of the equipment which is then deducted from the sale proceeds to achieve the gain or loss on sale of equipment . The income of year 5 is affected by this loss and it is reflected in the net cash flow of that year . The after tax return is calculated using the IRR function on the net cash flows of the equipment . The IRR is the expected rate of return on a project and at this rate the NPV of a project is zero (Brigham and Ehrhardt , Financial Management : Theory and Practice 11th Edition Year Investment Income MACRS Depreciation Pre-Tax Income Tax Net Cash Flow

0 (100 ,000 .00 (100 ,000 .00

1

30 ,000 .00 10 10 ,000 .00 20 ,000 .00 6 ,800 .00 23 ,200 .00

2

30 ,000 .00 18 18 ,000 .00 12 ,000 .00 4...