1. The PARC Company, a large profitable corporation, has decided to purchase a n
ID: 2752453 • Letter: 1
Question
1. The PARC Company, a large profitable corporation, has decided to purchase a new widget machine. The following cost data concerning the widget machine have been provided. First cost = $3,156,000. Salvage value = $119,000. Life = 10 Years. Annual benefits = $885,000. Annual M & O Costs = $97,700. PARC has been advised to consider at least four separate alternatives:
Direct purchase the machine with internally generated funds. Under these conditions, PARC uses MACRS. This particular project has a depreciation life of seven years. The combined income tax rate is composed of 6% state tax rate and 31% fed rate. The investment tax credit rate is 9% and the capital gains tax is 31%. PARC uses an after-tax MARR of 12%.
PARC can decide to take out a loan for 35% of the first cost. The loan will have an interest rate of 12% and consists of eight annual payments. The tax and other considerations are the same as in 1) above.
By purchasing an adjacent piece property and constructing a separate structure to house the new machine, the rent paid by the company will be reduced by $250,000 per year. The new building will cost $850,000 and the land will cost an additional $150,000. Assume they will purchase the building and property in the first month of the first year and will be sold in the last month of the 10th year. If they decide to go with this option they will use MACRS depreciation with 7 year life for the machine and the tax and information in option 1) dealing with tax rates and MARR. And also assume they can sell the land and building for the ending book value at the end of the life of the project.
They have an offer to lease from 1-Eye Machine Works a machine that will produce the widgets for $450,000 per year with the tax conditions etc as in 1) above.
PREFERABLY USING EXCEL PLS!!!
Explanation / Answer
1
Net present value of project = Present value of cash Inflow - Present value of cash outflow
= 3199188 - 2871960
= 327228
Present value of cash outflow
Particulars
Equipment
PVF
PV (amount)
Initial investment
3156000
1
3156000
Less- 9% tax credit
284040
1
284040
Present value of cash outflow
2871960
Present value of cash Inflow
Particulars
Year 1
Year 2
Year3
Year4
Year5
Year6
Year7
Year8
Annual benefits
$885,000
$885,000
$885,000
$885,000
$885,000
$885,000
$885,000
$885,000
Less- M & O costs
$ 97700
$ 97700
$ 97700
$ 97700
$ 97700
$ 97700
$ 97700
$ 97700
Less- depreciation
473400
670650
362151
214474
129179
117553
106973
-
Annual income
313900
116650
425149
572826
658121
669747
680327
787300
Less- tax @37%
116143
43160
157305
211946
243505
247806
251721
291301
Cash flow after tax before depreciation
671157
744140
629995
575354
543795
539494
535579
495999
Add- scrapped value (net of tax)
-
417412
Net annual cash flow
671157
744140
629995
575354
543795
539494
535579
913411
Present value factor
.892
.797
.712
.636
.567
.507
.452
.404
PV of cash inflow
598672
593079.6
448556.4
365925.1
308331.8
273523.5
242081.7
369018
Total PV of cash inflow = 3199188
sale of equipment 119000
WDV 1081620
Net gain ( 962620)
Tax @31% 298412
scrap value (net of tax) 417412
Depreciation
1. 15% = 473400
2. 25% = 670650
3. 18% = 362151
4 13% = 214474
5. 9% = 129179
6 9% = 117553
7 9% = 106973
2
Net present value of project = Present value of cash Inflow - Present value of cash outflow
= 2,935,469 - 3021258
= -85789
Present value of cash outflow
Particulars
Equipment
PVF
PV (amount)
Initial investment
2051400
1
2051400
Less- 9% tax credit
284040
1
284040
Add- annual repayment of loan
138075
4.967
685818
Present value of cash outflow
3021258
Present value of cash Inflow
Particulars
Year 1
Year 2
Year3
Year4
Year5
Year6
Year7
Year8
Annual benefits
$885,000
$885,000
$885,000
$885,000
$885,000
$885,000
$885,000
$885,000
Less- M & O costs
$ 97700
$ 97700
$ 97700
$ 97700
$ 97700
$ 97700
$ 97700
$ 97700
Less- interest cost
132552
115983
99414
82845
66276
49707
33138
16569
Less- depreciation
473400
670650
362151
214474
129179
117553
106973
-
Annual income
$181,348
$667
$325,735
$489,981
$591,845
$620,040
$647,189
$770,731
Less- tax @37%
$67,099
$246.79
$120,522
$181,293
$218,983
$229,415
$239,460
$285,170
Cash flow after tax before depreciation
$587,649
$671,070
$567,364
$523,162
$502,041
$508,178
$514,702
$485,560
Add- scrapped value (net of tax)
-
417412
Net annual cash flow
$587,649
$671,070
$567,364
$523,162
$502,041
$508,178
$514,702
902972
Present value factor
.892
.797
.712
.636
.567
.507
.452
.404
Total PV of cash inflow = $2,935,469.38
Particulars
Equipment
PVF
PV (amount)
Initial investment
3156000
1
3156000
Less- 9% tax credit
284040
1
284040
Present value of cash outflow
2871960
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