a new 5-axis CNC machine can be bought for $2,000,000. The company is considerin
ID: 2722780 • Letter: A
Question
a new 5-axis CNC machine can be bought for $2,000,000. The company is considering 3 means of buying the machine, a cash purchase or two types of loans. 4 year loans are available at 5.7% interest.
One loan requires only interest payment for the first 3 years with the entire principal and the last year's interest at the end of year 4.
The other loan, also at 5.7% is based on a capital recovery with a return, an A/P relationship.
Operating and maintenance costs are estimated at $160,000 for the first year, increasing at 10% per year.
using the MACRS for 5 years to calculate depreciation, determine the equivalent annual cash cost to the company for a 6 year study period.
The company is progitable and pays an annual income tax rate of 45%. Use a MARR of 18%. Consider three cases, the cash purchase and each of the two loans described above. If the machine is sold exactly 3 years after its purchase for $900,000. What is the capital gaain or loss on the sale of the machine?
Show your work :)
Explanation / Answer
As per MACRS table rate of depreciation for 5 years table for 6 years study period is 5.76
Year
Diminishing balance method
Straight line method
Current depreciation
Accumulated depreciation
Book value
1
2,000,000 * 5.76/100 = 115,200
115,200
115,200
115,200
1,884,800
2
1,884,800 * 5.67/100 = 106,868
115,200
115,200
230,400
1,777,932
3
1,777,932 *5.67/100 = 1,00,809
115,200
115,200
345,200
1,677,123
4
1,677,123 * 5.67/100 = 95,093
115,200
115,200
460,800
1,582,083
5
1,582,083 * 5.67/100 = 89,701
115,200
115,200
576,000
1,492,382
6
1,492,382 * 5.67/100 = 84,618
115,200
115,200
691,200
1,407,762
Year
Maintenance cost ($)
Depreciation
Interest
Total cost to the company
160,000
115,200
1,14,000
3,89,200
176,000
115,200
1,14,000
405,200
193,600
115,200
1,14,000
422,800
212,960
115,200
1,14,000
442,160
234,256
115,200
1,14,000
463,456
257,682
115,200
1,14,000
486,882
Total cost to the company
2,220,498
Sale value = $ 9,00,000 but cost to the company = $ 828,000 which indicates a profit of $72,000
Year
Diminishing balance method
Straight line method
Current depreciation
Accumulated depreciation
Book value
1
2,000,000 * 5.76/100 = 115,200
115,200
115,200
115,200
1,884,800
2
1,884,800 * 5.67/100 = 106,868
115,200
115,200
230,400
1,777,932
3
1,777,932 *5.67/100 = 1,00,809
115,200
115,200
345,200
1,677,123
4
1,677,123 * 5.67/100 = 95,093
115,200
115,200
460,800
1,582,083
5
1,582,083 * 5.67/100 = 89,701
115,200
115,200
576,000
1,492,382
6
1,492,382 * 5.67/100 = 84,618
115,200
115,200
691,200
1,407,762
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.