5) (35 points) Because of high operating and maintenance costs, a company is con

Question

5) (35 points) Because of high operating and maintenance costs, a company is considering a replacement for an aging machine that has been fully depreciated for tax purposes. The new machine will have an initial cost of $50,000 and is expected to generate an annual savings of $10,000 in operating and maintenance costs. Its estimated salvage value at the end of its useful life of 4 years will be $20,000. The new machine is a MACRS- GDS 3-year property for calculating depreciation deductions. The effective tax rate is 40%. Use an after-tax MARR of 10% per year compounded annually. a) (25 points) For this new machine, determine the after-tax cash flow for each year of operation. EOY BTCE MACRS-GDS Taxable Income Tax ATCF 4 b) (10 points) Use present worth analysis to determine if the company should replace the existing machine.

Explanation / Answer

5) a) ATCF : year BTCF dep- MACRS Taxable income Tax *0.4 ATCF (TI - tax + dep) 0 -50000 1 10000 9999 1 0.4 9999.6 2 10000 13335 -3335 -1334 11334 3 10000 4443 5557 2222.8 7777.2 4 10000 2223 7777 3110.8 6889.2 b) Present worth analysis : year BTCF dep- MACRS Taxable income Tax ATCF discount 10% Present worth 0 -50000 -50000 1 -50000 1 10000 9999 1 0.4 9999.6 0.909 9089.63 2 10000 13335 -3335 -1334 11334 0.826 9361.88 3 10000 4443 5557 2222.8 7777.2 0.751 5840.68 4 10000 2223 7777 3110.8 6889.2 0.683 4705.32 salvage 20000 8000 12000 0.683 8196 Present Worth -12806.48 No, the company should not replace the existing machine as the present worth is negative.

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