Problem 10-1 (algorithmic) Question Help A firm is considering purchasing a mach

Question

Problem 10-1 (algorithmic) Question Help A firm is considering purchasing a machine that costs $65,000. It will be used for six years, and the salvage value at that time is expected to be zero. The machine will save $43,000 per year in labor, but it will incur $10,000 in operating and maintenance costs each year. The machine will be depreciated according to five-year MACRS. The firm's tax rate is 40%, and its after-tax MARR is 11%. Should the machine be purchased? Click the icon to view the MACRS depreciation schedules. Click the icon to view the interest factors for discrete compounding when ,-11% per year. The present worth of the project is S.(Round to the nearest dollar.)

Explanation / Answer

Woking notes:

(1) MACRS Depreciation schedule as follows.

(2) Before tax cash flow (BTCF) ($) = Annual labor savings - Annual operating cost = 43,000 - 10,000 = 33,000

(3) Taxable income (TI) = BTCF - Annual depreciation

(4) Net income (NI) = TI x (1 - Tax rate) = TI x (1 - 0.4) = TI x 0.6

(5) After-tax cash flow (ATCF) = NI + Annual depreciation

(Year 0, ATCF = - $65,000)

ATCF and Present Worth are computed as follows.

Since Present Worth is positive, machine should be purchased.

Year Asset Cost ($) Depreciation Rate (%) Annual Depreciation ($) (A) (B) (C) = (A) x (B) 1 65,000 20 13,000 2 65,000 32 20,800 3 65,000 19.2 12,480 4 65,000 11.52 7,488 5 65,000 11.52 7,488 6 65,000 5.76 3,744

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