## Depreciation and Taxes Review

1. You bought a machine three years ago for $5000. It has been depreciated
with the straight line method assuming a tax life of 5 years and zero tax salvage.
What is the book value of the machine at this time?

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2. A machine costs $5000, will result in a net income of $1500 per year for
five years. Its tax life and actual life are both five years. Its tax salvage
and actual salvage are both zero. With a tax rate of 40%, what after tax cash
flow should we consider to evaluate this investment? With an after-tax MARR
of 10%, do we accept or reject the investment in the machine.

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3. How would the situation change in 2 if the actual salvage of the machine
were $5000 while the tax salvage remained at zero? The capital gains tax is
40%. With an after-tax MARR of 10%, do we accept or reject the investment in
the machine.

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4. How would the ATCF of problem 2 change if the SYD method were used for depreciation?
The tax salvage is 0 in this case and the tax life is 5 years. With an after-tax
MARR of 10%, do we accept or reject the investment in the machine.

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5. We assume that the ordinary income tax rate is the same as the capital gain
tax rate. What kind of depreciation results in smallest total taxes over the
life of the investment, SYD or straight line depreciation? Why?

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6. Why would any investor prefer SOYD depreciation to the straight line depreciation?

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7. A truck whose value on the books was $3000 in 1995, was sold for $4000 in
the same year. $200 was spent on minor repairs to ready the truck for sale.
Was there a capital gain associated with the sale? If so, how much was it?

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8. Under what circumstances would you pay a tax on money received as
salvage for a piece of equipment?

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9. How does depreciation affect the after-tax cash flow?

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10. You are a homeowner. You compute the net annual cost of your house
to be $10,000 per year for the four year assumed life. You are reminded
that the interest you pay on your home loan is deductible from your taxable
income. The interest is about $3000 per year. With a tax rate of 30%,
how does this change the net annual cost?

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