(4) (8 pts) ABC Inc. purchased a robotic welding system for $485,000. The equipm

Question

(4) (8 pts) ABC Inc. purchased a robotic welding system for $485,000. The equipment has O&M; cost of $22,000 per year. The robotic welding system will result in an annual saving of $197,000 ABC Inc. will sell the drilling equipment to a smaller company for 100,000 after 5 years of service. Assume that straight-line depreciation is used (assume the system's life time for depreciation is S years). The company uses an after-tax MARR rate of 8% and they are in the 37% tax bracket. Determine the after-tax net present worth of the asset over the 5-year service period

Explanation / Answer

Annual revenue 197000 Less: Annual O&M expense 22000 Net annual savings 175000 Less: Dep (485000-100000)/5 77000 Net income before tax 98000 Less: Tax @ 37% 36260 Net income after tax 61740 Add: Depreciation 77000 Annual cash inflows 138740 Annuity PVF at 8% fr 5 years 3.9927 Present value of inflows 553947.2 Add: Present value of salvage 68060 (100000*0.6806) Present value of total inflows 622007.2 Less: Initial investment 485000 Net present value 137007.2

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