A special purpose machine tool set would cost $20,000. The tool set will be fina

Question

A special purpose machine tool set would cost $20,000. The tool set will be financed by a S10.000 bank loan repayable in two equal annual installments at 10% compounded annually. The tool is expected to provide annual (material) savings of $30,000 for two years and is to be depreciated by the MACRS three-year recovery period. The tool will require annual 08M costs in the amount of $5,000. The salvage value at the end ofthe two years i expected to be SB,000, Assuming a marginal ax ate of 40% and MARR of 15%, what is the net present worth of this project?

Explanation / Answer

Since there is 10,000 bank loan. Th initial cost = 20,000-10,000 = 10,000

The 2 annual payments for the bank loan = PMT(rate,nper,pv) = PMT(0.10,2,10000) = 5,761.90

We will comsider 761.90 each year as the interest payment and 5000 as the principal repayment.

The after tax salavge value calculation is as shown below:

The Net present worth calculation is as shown below:

Net present Worth = $7,215.22

Resale value 8000 Book Value 12222 Taxable value 4222 Taxes -1688.8 After tax salvage value 9688.8

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