An automaker is considering installing a three-dimensional (3-D) computerized ca
ID: 2577149 • Letter: A
Question
An automaker is considering installing a three-dimensional (3-D) computerized car-styling system at a cost of $295,000 (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 23%. The expected savings in dollars is $211,000 per year. The training and operations and maintenance cost for the new system is expected to be $56,000 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 $5,300. The automaker's marginal tax rate is 39.9%. Compute the rate of return of the project. Enter your answer as a percentage between 0 and 100.
Explanation / Answer
Income and Cashflow generated each year
Amount in $
Expected savings
211000
Training and maintenance cost
-56000
Depreciation
(295000-5300)/5
-57940
Income before tax
97060
Tax at 39.9%
38727
Income after tax
58333
Cash flow after tax (each year)
(Income after tax + depreciation)
116273
Cash flow generated for 5 years
(Cash flow * 5 years)
581365
Return generated over the life of project
Cash flow generated for 5 years
581365
Salvage valueof machinery at the end of 5 years
5300
-Initial cost
-295000
Net return
291665
Rate of Return in percentage
Net Return
291665
Initial cost
295000
Rate of return over the life
291665/295000*100 =
98.87
Income and Cashflow generated each year
Amount in $
Expected savings
211000
Training and maintenance cost
-56000
Depreciation
(295000-5300)/5
-57940
Income before tax
97060
Tax at 39.9%
38727
Income after tax
58333
Cash flow after tax (each year)
(Income after tax + depreciation)
116273
Cash flow generated for 5 years
(Cash flow * 5 years)
581365
Return generated over the life of project
Cash flow generated for 5 years
581365
Salvage valueof machinery at the end of 5 years
5300
-Initial cost
-295000
Net return
291665
Rate of Return in percentage
Net Return
291665
Initial cost
295000
Rate of return over the life
291665/295000*100 =
98.87
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