3. A telephone company is considering building a new automated switching distrib

Question

3. A telephone company is considering building a new automated switching distribution substation with a useful life of 20 years to support new suburban developments. The substation is located in a state in which the combined tax rate is 40%, and the telephone company uses a l 5% real interest MARR to assess capital investment projects. Estimated real dollar revenues and costs are as follows Building initial cost Building salvage cost Equipment initial cost Equipment cost year 2 Equipment salvage value $36,500 Annual revenues Revenue arithmetic gradient $ 20,000 years 2 to 5 Annual revenues Annual operating expenses $1,157,000 S 250,000 $ 575,000 $ 150,000 S 650,000 year 1 750,000 years 6 to 20 185,000 first 10 years 230,000, years I1 to 15 275.000, years 16 to 20 S The substatowill be put into service on the first day of the telephone company's fiscal year. Using MACRS depreciation, what wil be the telephone company's after tax equivalent uniform annual worth for the substation?

Explanation / Answer

please consult the Net present value of annuity table

THE TELEPHONE COMPANY'S AFTER TAX EQUIVALENT UNIFORM ANNUAL WORTH FOR THE SUBSTATION IS POSITIVE FOR $552572

period cash flow gross cash flow depreciation after tax profit after tax cash flow discount rate NPV 0 $1157000+575000 $(1732000) (1732000) 1 $(1732000) 1 650000-185000 465000 94100 222540 316640 0.870 275477 2 150000+670000-185000 635000 94100 324540 478640 0.756 361852 3 690000-185000 505000 94100 246540 340640 0.658 224141 4 710000-185000 525000 94100 258540 352640 0.572 201710 5 730000-185000 545000 94100 270540 364640 0.497 181226 6-10 565000 565000 94100 282540 376640 (5.019-3.352)= 1.607 605260 11-15 520000 520000 94100 255540 349640 (5.847-5.019)=0.828 284502 16-20 475000 475000 94100 228540 322640 6.259-5.847)=0.412 132927 20 250000+36500 286500 94100 286500 286500 0.061 17477 NPV $552572

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