1.Consider the following data on an asset: Cost of an asset, I is $209,000. Usef
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Question
1.Consider the following data on an asset:
Cost of an asset, I is $209,000.
Useful life, N is 6 years.
Salvage value, S is $53,000.
Compute the resulting book value at the end of year 3 using the straight-line depreciation method.
2.An industrial engineer proposed the purchase of an RFID Fixed-Asset Tracking System for the company's warehouse and weave rooms. The engineer felt that the purchase would provide a better system of locating cartons in the warehouse by recording the locations of the cartons and storing the data in the computer. The estimated investment, annual operating and maintenance costs, and expected annual savings are as follows:
-Cost of equipment and installation: $138,000
-Project life: 6 years
-Expected salvage: $22,000
-Investment in working capital (fully recoverable at the end of the project life): $27,000
-Expected annual savings on labor and materials: $58,300
-Expected annual expenses: $9,200
-Depreciation method: five-year MACRS
As a part of this project, the firm will take a loan of $36,000 to be repaid in three equal annual payments at 11.9% interest. The firm's marginal tax rate is 35%. Determine the IRR of the RFID system. Express your answer as a percentage between 0 and 100.
Explanation / Answer
1 Cost of an Asset 2,09,000 Less: Salvage value 53,000 1,56,000 Expected Life 6 Years Depreciation 26,000 P.A Depreciation for three years 3 Total Depreciation for Three 78,000 Book Value at the end 3 years 1,31,000 i.e.(209,000-78,000) 2 Initial Outflow Machine 1,38,000 Working Capital 27,000 Less: Loan (36,000) Total 1,29,000 Capital inflow at the end of project Working capital 27,000 Salvage Value after tax (22000*(1-.35)) 14,300 41,300 Calculation of the equal instalments Principal 36,000 Rate of Interest 11.90% Years 3 Monthly Mortgage Payment= =(36000*11.9%*(1+11.9%)^3)/((1+11.9%)^3-1) 14,963 Calculation of Deprecition Year 5-year Depreciation 1 20.00% 27,600.00 2 32.00% 44,160.00 3 19.20% 26,496.00 4 11.52% 15,897.60 5 11.52% 15,897.60 6 5.76% 7,948.80 17% 18% Year Capital/ Loan Inflow/ (Outflow) Annual Saving Annual Expenses Depreciation Annual Income Tax at 35% Net Cash Inflow DIS. FACTOR=10%=(1/(1+.17)^N) DIS. FACTOR=15%=(1/(1+.18)^N) PV at 17% PV at 18% A B C D E=B-C-D F=E*35% G=E+D-F-A H I J=G*H J=G*I 0 (1,29,000) - (1,29,000) 1 1 (1,29,000) (1,29,000) 1 (14,963) 58,300 9,200 27,600 21,500 7,525 26,612 0.854701 0.847458 22,745 22,553 2 (14,963) 58,300 9,200 44,160 4,940 1,729 32,408 0.730514 0.718184 23,674 23,275 3 (14,963) 58,300 9,200 26,496 22,604 7,911 26,226 0.624371 0.608631 16,374 15,962 4 58,300 9,200 15,898 33,202 11,621 37,479 0.533650 0.515789 20,001 19,331 5 58,300 9,200 15,898 33,202 11,621 37,479 0.456111 0.437109 17,095 16,382 6 41,300 58,300 9,200 7,949 41,151 14,403 75,997 0.389839 0.370432 29,627 28,152 516 (3,345) IRR=17+516/(516+3345)*(18-17) 17.13%
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