A large and pro?table company, in the 34% marginal tax bracket, is considering t

Question

A large and pro?table company, in the 34% marginal tax bracket, is considering the purchase of a new piece of machinery that will yield bene?ts of $10,000 for Year 1, $15,000 for Year 2, $20,000 for Year 3, $20,000 for Year 4, and $20,000 for Year 5. The machinery is to be depreciated by using the modi?ed accelerated cost recovery system (MACRS) with a 3-year recovery period. The MACRS percentages are 33.33, 44.45, 14.81, 8.41, respectively, for Years 1, 2, 3, and 4. The company believes the machinery can be sold at the end of 5 years of use for 25% of the original purchase price. If the company requires a 12% a?er-tax rate of return, what is the maximum purchase price it can pay that makes economic sense?

points are going to be awerded only if the detailed calculation on excel are shown!

Explanation / Answer

By Hit and trial the Machine cost of 27555makes the NPV as zero . Thus Maximum price that can be paid is 27555

Year 0 1 2 3 4 5 Machine cost(Hit and trial) -27555 Benefit 10000 15000 20000 20000 20000 MACRS Dep 0.3333 0.4445 0.1481 0.0841 0 Dep -9184.082 -12248.1975 -4080.896 -2317.38 0 Termian value when machine sold -6888.75 Benifit after tax(34%* Benefit) Bitmap Bitmap Bitmap 6600 Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap 9900 Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap 13200 Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap 13200 Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap 13200 Tax shield due to dep(Dep*tax) -3122.588 -4164.38715 -1387.504 -787.908 0 Cash flow
(Benefit after tax + shield + terminal value) 3477.412 5735.61285 11812.496 12412.09 6311.25 PV -27555 3104.832 4572.395448 8407.901 7888.109 3581.173 NPV -0.58934

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