A manufacturing company is considering acquiring a new injection-molding machine

Question

A manufacturing company is considering acquiring a new injection-molding machine at a cost of $150,000. Because of a rapid change in product mix, the need for this particular machine is expected to last only eight years, after which time the machine is expected to have a salvage value of $10,000. The annual operating cost is estimated to be $11,000. The addition of the machine to the current production facility is expected to generate an annual revenue of $48,000. The firm has only $100,000 available from its equity funds, so it must borrow the additional $50,000 required at an interest rate of 10% per year with repayment of principal and interest in eight equal annual amounts. The applicable marginal income tax rate for the firm is 10%. Assume that the asset qualifies for a seven year MACRS property class

(a) Determine the after-tax cash flows

(b) Determine the NPW of this project at MARR = 14%

Explanation / Answer

The annual loan payment is calculated as follows

$ 50,000 = A X PVIFA 10% , 8 years

$ 50,000 = A X 5.335

A = $ 9,372.07

After tax cash flows = ( Revenues - Expenses - Depreciation - loan expense) X ( 1 - tax rate) + Depreciation

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b) The Net present worth of the project at MARR = 14%

NPW = - $ 150,000 + $ 128,513.64

NPW = - $ 21,486

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year Revenues Expenses Depreciation rate per year % Depreciation per year Annual Loan payment After tax cash flows Discounted after tax cash flows 0 0 ($150,000) 1 $48,000 $11,000 14.29% 21435.00 $9,372.07 27008.637 23691.78684 2 $48,000 $11,000 24.49% 36735.00 $9,372.07 28538.637 21959.55448 3 $48,000 $11,000 17.49% 26235.00 $9,372.07 27488.637 18554.04699 4 $48,000 $11,000 12.49% 18735.00 $9,372.07 26738.637 15831.41961 5 $48,000 $11,000 8.93% 13395.00 $9,372.07 26204.637 13609.86732 6 $48,000 $11,000 8.92% 13380.00 $9,372.07 26203.137 11937.79672 7 $48,000 $11,000 8.93% 13395.00 $9,372.07 26204.637 10472.35097 8 $48,000 $11,000 4.46% 6690.00 $9,372.07 25534.137 8951.222933

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