Question:Use After Tax Present Worth Cost analysis to make your economic decisio
ID: 2525175 • Letter: Q
Question
Question:Use After Tax Present Worth Cost analysis to make your economic decision, and verify with an incremental ROR
(it can be solved using an excel sheet to make the cost analysis)
Your company is looking to install a sensor on a gas pipeline to help monitor and regulate the efficiency of the compressors. The new sensor will cost $7,000 per compressor and your company has 20 compressors along the section of pipe you plan to test the new product. The new sensors will be installed in year zero, and put into service in year 1. Operating costs for each sensor will cost $100/per month/per compressor. The new sensors will be depreciable 7-Year MACRS property, and start the first year’s deduction in year 1. If the sensors work properly the company’s existing operating costs of $500,000 will decrease by 20% each year to $400,000 in each of years 1- 10. The existing compressors are already completely depreciated. Please use After Tax Present Worth Cost analysis to make your economic decision, and verify with an incremental ROR. Assume an effective corporate tax rate of 25%. Your company’s minimum rate of return is i* = 15%, and assume your company has other income to utilize all deductions in the year incurred (expense scenario).
Your company is looking to install a sensor on a gas pipeline to help monitor and regulate the efficiency of the compressors The new sensor will cost $7,000 per compressor and your company has 20 compressors along the section of pipe you plan to test the new product. The new sensors will be installed in year zero, and put into service in year 1. Operating costs for each sensor will cost $100/per month/per compressor. The new sensors will be depreciable 7-Year MACRS property, and start the first year's deduction in year 1. If the sensors work properly the company's existing operating costs of $500,000 will decrease by 20% each year to $400,000 in each of years 1 10. The existing compressors are already completely depreciated. Please use After Tax Present Worth Cost analysis to make your economic decision, and verify with an incremental ROR. Assume an effective corporate tax rate of 25%. Your company's minimum rate of return is i* = 15%, and assume your company has other income to utilize all deductions in the year incurred (expense scenario) Year New Sensor Cost Old Operating Costs New Operating Costs Additional Sensor Operating Cost 1-10 140,000 500,000 400,000 24,000Explanation / Answer
(40,000)
Depreciation has been calculated at 28.57% i.e (100/7*2) on the basis of double declining method
Years New sensorcost € Operating
cost (A) Reduction in operating cost
(B) Depreciation
(C) Net profit Tax (D) Net cash flow (A+B+D+E) Discount rate PV 0 (140,000) (140,000) 1.00 (140,000) 1 (24,000) 100,000
(40,000)
36,000 (9,000) 67,000 0.87 58,261 2 (24,000) 100,000 (28,571) 47,429 (11,857) 64,143 0.76 48,501 3 (24,000) 100,000 (20,408) 55,592 (13,898) 62,102 0.66 40,833 4 (24,000) 100,000 (14,577) 61,423 (15,356) 60,644 0.57 34,674 5 (24,000) 100,000 (10,412) 65,588 (16,397) 59,603 0.50 29,633 6 (24,000) 100,000 (7,437) 68,563 (17,141) 58,859 0.43 25,447 7 (24,000) 100,000 (18,593) 57,407 (14,352) 61,648 0.38 23,176 8 (24,000) 100,000 76,000 (19,000) 57,000 0.33 18,633 9 (24,000) 100,000 76,000 (19,000) 57,000 0.28 16,203 10 (24,000) 100,000 76,000 (19,000) 57,000 0.25 14,090 NPV 169,450Related Questions
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