Spear Company is considering a $5.4 million asset investment that has a four-year service life and a $400,000 salvage value. The investment is expected to produce annual savings in cash operating costs of $860,000 and will require a $250,000 overhaul in year 3, which is fully-deductible for tax purposes.
Spear uses the net-present-value method to analyze investments. Asset investments are depreciated by the straight-line method, ignoring salvage values in related computations.
Required:
A. Ignoring income taxes, determine the (pre-discounted) cash-flow amounts that would be used in a net-present-value analysis for (1) the asset acquisition, (2) annual savings in cash operating costs, (3) annual straight-line depreciation, (4) the overhaul in year 3, and (5) disposal of the asset in year 4. Note cash outflows in parentheses.
B. Repeat requirement "A," assuming the company is subject to a 30% income tax rate. Assume the company depreciates the asset using the optional straight-line method. Additionally, it depreciates it over the asset's service life (not its MACRS life).

Question

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The Answer of Spear Company is considering a $5.4 million asset investment that has a four-year service life and a $400,000 salvage value. The investment is expected to produce annual savings in cash operating costs of $860,000 and will require a $250,000 overhaul in year 3, which is fully-deductible for tax purposes.
Spear uses the net-present-value method to analyze investments. Asset investments are depreciated by the straight-line method, ignoring salvage values in related computations.
Required:
A. Ignoring income taxes, determine the (pre-discounted) cash-flow amounts that would be used in a net-present-value analysis for (1) the asset acquisition, (2) annual savings in cash operating costs, (3) annual straight-line depreciation, (4) the overhaul in year 3, and (5) disposal of the asset in year 4. Note cash outflows in parentheses.
B. Repeat requirement "A," assuming the company is subject to a 30% income tax rate. Assume the company depreciates the asset using the optional straight-line method. Additionally, it depreciates it over the asset's service life (not its MACRS life).

Spear Company Is Considering a $5