You are evaluating two different silicon wafer-milling machines. The Techron I c
ID: 2742132 • Letter: Y
Question
You are evaluating two different silicon wafer-milling machines. The Techron I costs $200,000, has an 8-year life, and has pre-tax operating costs of $15,000 per year. The Techron II costs $300,000, has a 10-year life, and has pre-tax operating costs of $17,500 per year. Both milling machines are in class 8 (CCA rate of 20 percent per year) and have a salvage value of $40,000. Your tax rate is 40 percent and your discount rate is 20 percent. a) What is the NPV for Techron I? b) What is the NPV for Techron II? c) Which machine should you buy and why?
Explanation / Answer
1.a) Techron 1
Negative taxes indicate tax advantage.
1.b)
c.)
Clearly, you should buy techron 2 although cost more but incremental revenues are showing positive npv as well and techron 2 gives you benefits in the form of depriciation tax shield and benefits of higher return's in the later years.
Particulars 0 1 2 3 4 5 6 Cash Inflow $ (200,000.00) Pre-tax operating cost $ (15,000.00) $ (15,000.00) $ (15,000.00) $ (15,000.00) $ (15,000.00) $ (15,000.00) Less: Taxes $ (80,000.00) $ (6,000.00) $ (6,000.00) $ (6,000.00) $ (6,000.00) $ (6,000.00) $ (6,000.00) Operating profit after Taxes $ (120,000.00) $ (9,000.00) $ (9,000.00) $ (9,000.00) $ (9,000.00) $ (9,000.00) $ (9,000.00) Add: depriciation non-cash expenses $ 40,000.00 $ 32,000.00 $ 25,600.00 $ 20,480.00 $ 16,384.00 $ 13,107.20 Net Inflow/outflow of cash $ (80,000.00) $ 31,000.00 $ 23,000.00 $ 16,600.00 $ 11,480.00 $ 7,384.00 $ 4,107.20 Discount factor $ 1.00 $ 0.83 $ 0.69 $ 0.58 $ 0.48 $ 0.40 $ 0.33 Present value of Cash inflows/outflows $ (80,000.00) $ 25,833.33 $ 15,972.22 $ 9,606.48 $ 5,536.27 $ 2,967.46 $ 1,375.49Related Questions
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