solve using engineering economics way (both parts a and b) 5) (40 points) A inco
ID: 2658198 • Letter: S
Question
solve using engineering economics way (both parts a and b)
5) (40 points) A income of $50,000 and company is considering purchasing new equipment that is expected to generate an additional annually. The equipment will have an initial cost of $75,000 and estimated annual operating maintenance costs of $30,000. Its estimated salvage value at the end of its useful life of 4 years will be S15,000. The equipment 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) (30 points) For this investment, determine the after-tax cash flow for each year of operation. EOY BTCF MACRS-GDS Taxable Tax ATCE uction Income 0 2 3 4 b) (10 points) Based on the present worth measure, determine if the company should consider the purchase o this new equipment further?Explanation / Answer
Year
cost of machine
MACRS rate
Annual depreciation
1
75000
33.33%
24997.5
2
75000
44.45%
33337.5
3
75000
14.81%
11107.5
4
75000
7.41%
5557.5
After tax salvage value
15000*(1-.4)
9000
Year
0
1
2
3
4
cost of machine
-75000
additional income
50000
50000
50000
50000
less operating cost
30000
30000
30000
30000
less annual depreciation
24997.5
33337.5
11107.5
5557.5
operating profit
-4997.5
-13337.5
8892.5
14442.5
less tax 40%
-1999
-5335
3557
5777
A - After tax cash flow
-2998.5
-8002.5
5335.5
8665.5
add depreciation
24997.5
33337.5
11107.5
5557.5
add after tax salvage value
9000
net operating cash flow
21999
25335
16443
23223
present value of cash flow = net operating cash flow/91+r)^n r= 10%
-75000
19999.09
20938.02
12353.87
15861.62
B- NPV =sum of present value of cash flow
-5847.4018
No company should not consider for the purchase as it results in Negative present worth
it is considered that annual depreciation is not included in operating and maintenance cost
Year
cost of machine
MACRS rate
Annual depreciation
1
75000
33.33%
24997.5
2
75000
44.45%
33337.5
3
75000
14.81%
11107.5
4
75000
7.41%
5557.5
After tax salvage value
15000*(1-.4)
9000
Year
0
1
2
3
4
cost of machine
-75000
additional income
50000
50000
50000
50000
less operating cost
30000
30000
30000
30000
less annual depreciation
24997.5
33337.5
11107.5
5557.5
operating profit
-4997.5
-13337.5
8892.5
14442.5
less tax 40%
-1999
-5335
3557
5777
A - After tax cash flow
-2998.5
-8002.5
5335.5
8665.5
add depreciation
24997.5
33337.5
11107.5
5557.5
add after tax salvage value
9000
net operating cash flow
21999
25335
16443
23223
present value of cash flow = net operating cash flow/91+r)^n r= 10%
-75000
19999.09
20938.02
12353.87
15861.62
B- NPV =sum of present value of cash flow
-5847.4018
No company should not consider for the purchase as it results in Negative present worth
it is considered that annual depreciation is not included in operating and maintenance cost
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