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sergij07 [2.7K]
3 years ago
7

Production equipment costing $500,000 has been purchased by a contract manufacturing company to meet the specific needs of a cus

tomer (Note: this equipment qualified for a 10% investment tax credit (ITC) at the time of purchase). The contracting award is for a 4-year contract with the possibility of extending the contract for another 4 years. The company plans to use MACRS to depreciate this equipment as a 7-year class property for tax purposes. The income tax rate for the company is 40%, and it expects to have an after-tax rate of return (MARR) of 12% for all its investments. The equipment has generated an annual income of $150,000 for the company for the first four years, however the customer decided not to renew the contract after 4 years. Consequently, the company has decided to sell the equipment for $200,000 at the end of 4 years.
Required:
Use the short-cut method to determine if the company has reached their rate of return (IRR) goal on this contract and investment.
Business
1 answer:
irina1246 [14]3 years ago
8 0

Answer:

Short-cut IRR = 18.75%

The company has not reached their rate of return goal on this contract and investment.

Explanation:

a) Data and Calculations:

Cost of production equipment = $500,000

Qualified investment tax credit (ITC) = 10% = $50,000 ($500,000 * 10%)

Contract period = 4 years with 4 years extension on renewal

Income tax rate for the company = 40%

Expected after-tax rate of return = 12%

Expected before-tax rate of return = 30% (12%/40%)

Annual income generated by the equipment = $150,000 for 4 years

Salvage value at the end of 4 years = $200,000

Short-cut IRR = 100%, divided by the number of years * about 75-80%

= 100%/4 * 75%

= 18.75%

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3 years ago
I now have $23,000 in the bank earning interest of .50% per month. I need $33,000 to make a down payment on a house. I can save
Elena-2011 [213]

Answer:

41.92 months

Explanation:

In this question, we use the NPER formula which is shown in the spreadsheet.  

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8 0
3 years ago
On January 1, Year 7, Colorado Corp. purchased a machine having an estimated useful life of 8 years and no salvage value. The ma
shepuryov [24]

Answer:

D) $0

Explanation:

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For example, if the purchase value was $1,200,000 (= $300,000 x 4), the remaining value would be $675,000 then the depreciation expense will be $112,500 per year during the next 6 years starting on year 9.

5 0
3 years ago
Bavarian Bar and Grill opened for business in November 2021. During its first two months of operation, the restaurant sold gift
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Answer:

A. Dr Cash 5,200

Cr Deferred revenue 5,200

Dr Cash 884

Dr Deferred revenue 1,300

Cr Sales revenue 2,100

Cr Sales taxes payable 84

B. $3,900

C. Sales tax liability - CURRENT $84

Sales taxes payable (4% × $2,100) = $84

Sales tax liability - NON CURRENT $0

Liability gift certificates - CURRENT $2,860

Liability gift certificates – NON CURRENT $1,040

Explanation:

A. Preparation of the appropriate journal entries (in summary form) for the gift certificates sold during 2011

Dr Cash 5,200

Cr Deferred revenue 5,200

Dr Cash 884

($2,100 + $84 – $1,300)

Dr Deferred revenue 1,300

Cr Sales revenue 2,100

Cr Sales taxes payable 84

(4% × $2,100)

B. Calculation to Determine the liability for gift certificates to be reported on the December 31, 2018, balancesheet.

Liability for gift certificates=(5,200- 1,300)

Liability for gift certificates= $3,900

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C. Calculation for the appropriate amount for each classification (current or noncurrent) of the liabilities at December 31, 2018

Sales tax liability - CURRENT $84

(4% × $2,100=$84)

Sales tax liability - NON CURRENT $0

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Liability gift certificates – NON CURRENT $1,040

($5,200 × 20%=1,040 )

Calculation for Liability gift certificates at December 31

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($ 5,200 × 80%)

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Answer:

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