1.A manufacturing firm is considering purchasing a new machine for $164,000. The
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Question
1.A manufacturing firm is considering purchasing a new machine for $164,000. The firm plans on borrowing $82,000 to be paid off in equal payments in 3 years. The interest rate on the loan is 6.9%. The machine is classified as 7-years MACRS. Using the machine will save $35,000 in labor costs each year. The annual O&M costs for the machine are $10,000. The firm plans on using the machine for 5 years after which it will be salvaged for $73,800.
Calculate the taxable income (i.e., income before taxes) for the income statement for year 5 if the firm purchases the machine.
2.An automaker is considering installing a three-dimensional (3-D) computerized car-styling system at a cost of $300,000 (including hardware and software). With the 3-D computer modeling system, designers will have the ability to view their design from many angles and to fully account for the space required for the engine and passengers. The digital information used to create the computer model can be revised in consultation with engineers, and the data can be used to run milling machines that make physical models quickly and precisely. The automaker expects to decrease the turnaround time for designing a new automobile model (from configuration to final design) by 25%. The expected savings in dollars is $272,000 per year. The training and operations and maintenance cost for the new system is expected to be $45,000 per year. The system has a five-year useful life and can be depreciated according to the five-year MACRS class. The system will have an estimated salvage value of $3,700. The automaker's marginal tax rate is 34.6%. Compute the rate of return of the project. Enter your answer as a percentage between 0 and 100
Explanation / Answer
1.
Cost Of Machine = $164,000
Loan (Taken for 3yrs) = $82,000
Rate Of Interest = 6.9% per year
Inetrest on Loan will be
Inetrest = Principal x Rate Of Interest x Time
For 1st Year
Interest = $82,000 x 6.9% x 1 yr
Interest = $5658 for 1st year
2nd year
Interest = $82,000 x 6.9% x 2 yr
Interest = $11316 for 2nd year
3rd year
Interest = $82,000 x 6.9% x 3 yr
Interest = $16974 for 3rd year
Now,
Saved Labour Cost by using machine is $35,000 per year
Depriciation per year is $10,000
Machine is used for 5 year
Taxable Income for the Income Statement for 5 years is a below
Hence
The Taxable Income for 5 years is
$183,342 for 1st year
$167,684 for 2nd year
$152,026 for 3rd year
$159,000 for 4th year
$149,000 for 5th year
INCOME STATEMENT FOR 1ST YEAR Particulars Amount Amount Revenues Machine $164,000 Labour Cost Saved $35,000 Total Revenue $199,000 Expenses Interest Expence $5,658 Depriciation $10,000 Total Expences $15,658 Net Income $183,342Related Questions
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