1. Zeon, a large, profitable corporation, is considering adding some automatic e

Question

1. Zeon, a large, profitable corporation, is considering adding some automatic equipment to its production facilities. The equipment costs $120,000 and will produce an initial annual benefit of $29,000, but the benefits are expected to decline $3000 per year. The firm uses sum-of-years-digits depreciation over the 3-year useful life of the equipment which has a $12,000 salvage value. Using present worth analysis, determine whether the equipment should be purchased if the after-tax MARR is 6%. Assume that the equipment can be sold for its $12,000 salvage value at the end of the 3 years. Also, assume a 46% income tax rate. (30 marks)

Explanation / Answer

For 6% MARR, as the NPW is negative so the investment is not worth.

Year Cash flow 46% tax on income Cash Flow with net income Discount factor Present worth 0 -120000 -120000 -120000 1 -120000.00 1 29000 13340 15660 0.94 14773.58 2 26000 11960 14040 0.89 12495.55 3 35000 16100 18900 0.84 15868.80 NPW -76862.06

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