2. The ABC company is considering purchasing a machine that costs $300,000 and e

Question

2. The ABC company is considering purchasing a machine that costs $300,000 and expected to yield $280,000 per year before taxes. The company had to borrow $80,000 which have to be repaid in two years at 8%. The cost of operating and maintaining the machine is $50,000 per year. The machine will be needed for two years and can be sold at the end of the second year for $140,000. For depreciation purposes the machine falls into the MACRS 10-year class. Find the missing values in the following tables in order to determine if this was a good investment at MARR of 12%. The company's income tax is 30%. Your decision should be based on the PW criterion NOTE:Determining the missing values (12 values) in the following tables and make a decision about purchasing the machine using the PW approach . 8 points) SOLUTION INCOME STATEMENT 2 End of Year: Revenue: Expenses 0 280,000 280,000 Operating Costs: Depreciation Debt Interest 50,000 25,200 3,323 50,000 Taxable Income: 195,600 58,680 Tax: (30%) Net Income: 141,033.9 CASH FLOW STATEMENT End of Year 2 Operating Activities:136,920 Net Income: Depreciation Machine Salvage Value: 28,000 25,200 Investment Activities 300,000 140,000 Gains Tax Financing Activities: Borrowed Money:80,000 Principal Repayment 1-41538.5 Net Cash Flow Presentworth = Decisiorn

Explanation / Answer

INCOME STATEMENT

CASH FLOW STATEMENT

Present worth-

=-220000+ 126458/(1.12)+306695.4/(1.122)

= -220000+112908.92+244495.69

= 137404.61

Decision- Since the present worth is positive we should buy this machine.

End of year: 0 1 2 Revenue 280000 280000 expenses operating cost 50000 50000 depreciation 28000 25200 Debt interest 6400 3323 taxable income 195600 201477 tax(30%) 58680 60443.10 Net income 136920 141033.9

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