ProbierS Consider the following financial information about a retooling project

Question

ProbierS Consider the following financial information about a retooling project at a computer manufacturing company: The project costs $2.1 million and has a five-year service life. The retooling project has a CCA rate of 30%. At the end of the fifth year, any assets held for the project will be sold. The expected salvage value will be about 10% of the initial project cost. The firm will finance 40% of the project money from an outside financial institution at an interest rate of 9%. The firm is required to repay the loan with five equal annual payments. The firm's incremental (marginal) tax rate on the investment is 40%. The firm's MARR is 18%. . · . · · · With the preceding financial information, (a) Determine the after-tax cash flows. ENG M 310 A1 Engineering Economy (Fall 2017) (b) Compute the annual equivalent worth for this project. Hint: You may use the posted Excel spreadsheet file.

Explanation / Answer

18% Year Outflow Salvage Depn Interest Exp BT Tax Saving40% EXP net of taxes CFAT FCF Dis factor DIS FCF 0        -12,60,000 -12,60,000      -12,60,000 1          -1,40,358         -6,30,000       -75,600    -7,05,600             -2,82,240               -4,23,360      2,06,640          66,282 0.847458        56,171.47 2          -1,52,990         -4,41,000       -62,968    -5,03,968             -2,01,587               -3,02,381      1,38,619        -14,371 0.718184      -10,320.70 3          -1,66,759         -3,08,700       -49,199    -3,57,899             -1,43,159               -2,14,739          93,961        -72,798 0.608631      -44,307.22 4          -1,81,767         -2,16,090       -34,190    -2,50,280             -1,00,112               -1,50,168          65,922     -1,15,845 0.515789      -59,751.82 5          -1,98,126            2,67,179         -1,51,263       -17,831    -1,69,094                 -67,638               -1,01,457          49,806      1,18,859 0.437109        51,954.31 Total 3.127171      -12,66,254 EUAC 1266254/3.127171        -4,04,920 Principal 840000 Int. 9% nperiod 5 Instalment $       2,15,958 Year Instalment Int Princ. Balance 0 $ 8,40,000 1 $       2,15,958 $          75,600 $ 1,40,358 $ 6,99,642 2 $       2,15,958 $          62,968 $ 1,52,990 $ 5,46,652 3 $       2,15,958 $          49,199 $ 1,66,759 $ 3,79,894 4 $       2,15,958 $          34,190 $ 1,81,767 $ 1,98,126 5 $       2,15,958 $          17,831 $ 1,98,126 $              -   Depn Year Depn Book Value                        -          21,00,000                         1            6,30,000        14,70,000                         2            4,41,000        10,29,000                         3            3,08,700           7,20,300                         4            2,16,090           5,04,210                         5            1,51,263           3,52,947 Salvage inflow net of taxes Salvage            2,10,000 Book value            3,52,947 Loss          -1,42,947 Tax saving               57,179 Total Inflow            2,67,179

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