An automobile manufacturing company is considering buying special handling devic

Question

An automobile manufacturing company is considering buying special handling devices for food and beverage manufacture. The new tool has a purchase price of $50,000 and zero salvage value. It is expected that the new tooling would generate annual benefits of $25,000 per year.

a) Calculate the after tax cash flow for four years, using a 40% cooperate income tax rate, and a MACRS depreciation schedule.

b) Use present worth analysis to determine whether the company should buy the new tooling if the after-tax MARR is 10%

Explanation / Answer

Purchase price = $ 50,000 Year Depreciation dep amount Book value 1 0.333 16,665 33,335 2 0.4445 14,817.40 18,517.59 3 12,500 12,500 6017.59 4 0.0741 445.9 5,571.68 After Tax cash flows = (annual benefits - depreciation) X 40% corporate income tax rate year 1 = (25,000 - 16,665) X 0.40 = 3,334 Year 2 = (25,000 - 14,817)X0.40 = 4037.20 year3 = (25,000 - 12,500) X 0.4 = 5000 year 4 = (25,000 - 445.9)X0.4 = 9,821.64 using the present net worth to check if the investment is worth year operating cash flows Discount factor @ 10% present value of cash flows 0 50,000 1 3,334 0.909 3030.606 2 4037.2 0.826 3334.727 3 5000 0.751 3755 4 9821.64 0.683 6708.18 16828.51 Net present value = - cash outflows + cash inflows NPV = - 50,000+ 16828.51 = - $ 33,171.49

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