Hack Wellington Co. (HWC) is considering the purchase of new manufacturing equip

ID: 2733663 • Letter: H

Question

Hack Wellington Co. (HWC) is considering the purchase of new manufacturing equipment equipment that wil cost $25,000 (including shipping and installation). HWC can take out a four-year, $25,000 loan to pay for the equipement at an interest rate of 6.00%. The loan and purchase agreements will also contain the following provisions:

- The annual maintenance expense for the equipment is expected to be $250

- The equipment has a four-year deprciable life. The Modified Accelerated Cost Recovery System's depreciation raes for a three-year asset are 33.33%, 44.45%, 14.81%, and 7.41% respectively

- The corporate tax rate for HWC is 35%

Note: Hack Wellington Co. is allowed to take a full-year depreciation tax-saving deduction in the first year.

Based on the preceding information, answer the following:

The Annual loan payment will be?

The Annual tax savings from maintenance will be?

Tax savings from depreciation? Year 1: Year 2: Year 3: Year 4:

Net Case flow? Year 1: Year 2: Year 3: Year 4:

Thus the net present value cost of owning the asset will be?

Explanation / Answer

Solution:

Particulars

Year

Equipment Cost

-25000

Loan amount

25000

Annual Loan repayment (Principal payment + Interest payment)

-7,214.79

Interest Payment

-1,500.00

-1,157.11

-793.65

-408.38

Principal payment

-5,714.79

-6,057.67

-6,421.14

-6,806.40

Annual Tax saving on interest pay

525.00

404.99

277.78

142.93

MACRS

33.33%

44.45%

14.81%

7.41%

Depreciation

8332.5

11112.5

3702.5

1852.5

Tax saving from depreciation

2916.375

3889.375

1295.875

648.375

Maintenance expense

-250

Tax saving on maintenance

87.5

Net Cash Flow

-3935.9123

-3082.923

-5803.63

-6585.977844