A manufacturing company has asked you to determine some of the after-tax cash fl
ID: 2417035 • Letter: A
Question
A manufacturing company has asked you to determine some of the after-tax cash flows for equipment used for research and development (5-yr property) that is being considered. The company expects the equipment to operate for 7 years and to require the purchase of $250,000 worth of capital equipment. The capital equipment will have a resale value of $70,000 at the end of the 7 years. The company plans to Use MACRS depreciation schedule for income tax calculations. The income tax rate is 35%, and the company uses an after -tax MARR of 10%. The equipment results in an increase in the company's before-tax annual income of $45,000. Determine if it is worth investing on this equipment.Explanation / Answer
Determine whether it is worth to accept the project or not:
Year
Before tax
annual
income
Tax rate
@35%
After tax
annual
income
Depreciation
rate on MACRS
Depreciation
expenses
Cash flow
MARR at
10%
Cash flows
after discounting
0
$ 250,000
1.000
$ (250,000.0)
1
$ 45,000
$ 15,750
$ 29,250
14.29
$ 35,725
$ 64,975
0.9091
$ 59,068.8
2
$ 45,000
$ 15,750
$ 29,250
24.49
$ 61,225
$ 90,475
0.8264
$ 74,768.5
3
$ 45,000
$ 15,750
$ 29,250
17.49
$ 43,725
$ 72,975
0.7513
$ 54,826.1
4
$ 45,000
$ 15,750
$ 29,250
12.49
$ 31,225
$ 60,475
0.683
$ 41,304.4
5
$ 45,000
$ 15,750
$ 29,250
8.93
$ 22,325
$ 51,575
0.6209
$ 32,022.9
6
$ 45,000
$ 15,750
$ 29,250
8.92
$ 22,300
$ 51,550
0.5645
$ 29,100.0
7
$ 45,000
$ 15,750
$ 29,250
8.93
$ 22,325
$ 51,575
0.5132
$ 26,468.3
NPV
$ 67,559.0
Note: It is assumed that before annual income is just before tax (but after depreciation).
As there is positive NPV of $67,559, it is advisable to accept the project.
Year
Before tax
annual
income
Tax rate
@35%
After tax
annual
income
Depreciation
rate on MACRS
Depreciation
expenses
Cash flow
MARR at
10%
Cash flows
after discounting
0
$ 250,000
1.000
$ (250,000.0)
1
$ 45,000
$ 15,750
$ 29,250
14.29
$ 35,725
$ 64,975
0.9091
$ 59,068.8
2
$ 45,000
$ 15,750
$ 29,250
24.49
$ 61,225
$ 90,475
0.8264
$ 74,768.5
3
$ 45,000
$ 15,750
$ 29,250
17.49
$ 43,725
$ 72,975
0.7513
$ 54,826.1
4
$ 45,000
$ 15,750
$ 29,250
12.49
$ 31,225
$ 60,475
0.683
$ 41,304.4
5
$ 45,000
$ 15,750
$ 29,250
8.93
$ 22,325
$ 51,575
0.6209
$ 32,022.9
6
$ 45,000
$ 15,750
$ 29,250
8.92
$ 22,300
$ 51,550
0.5645
$ 29,100.0
7
$ 45,000
$ 15,750
$ 29,250
8.93
$ 22,325
$ 51,575
0.5132
$ 26,468.3
NPV
$ 67,559.0
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