Some new production machinery has a first cost of $100,000 and a useful life of
ID: 2754503 • Letter: S
Question
Some new production machinery has a first cost of $100,000 and a useful life of 10 years. Its estimated O&M costs are $10,000 the first year, which will increase annually by $4,000. The asset’s before tax market value will be $50,000 at the end of the first year and then will decrease by $5,000 annually. This property is a 7-year MACRS property. The company uses a 6% after-tax MARR and is subject to a combined federal/state tax rate of 40% Determine:
a) The after-tax cash flows.
b) The property’s economic service life after tax
Explanation / Answer
Present value of cash outflow
Particulars
(at Y= 0) Amount
Cash outflow
$100,000
PVF (Y=0)
1
Present value of cash outflow
$100,000
Present value of cash Inflow = 50390
Particulars
Y=1
Y=2
Y=3
Y=4
Y=5
Y=6
Y=7
Y=8
Y=9
Y=10
Annual cash inflow
$50,000
$45000
$40000
$35000
$30000
$25000
$20000
$15000
$10000
$5000
Less- O&M cost
$10000
$14000
$18000
$22000
$26000
$30000
$34000
$38000
$42000
$46000
Add- tax saving on depreciation
$6000
$8500
$4590
$2718.30
1637.25
$1489.90
$1355.81
Cash inflow
$46,000
$39,500
$26,590
$15,718
$5,637
($3,510)
($12,644)
($23,000)
($32,000)
($41,000)
PVF (6%)
0.943
0.890
0.840
0.792
0.747
0.705
0.665
0.627
0.592
0.558
PV of cash inflow
$43,396.23
$35,154.86
$22,325.48
$12,450.37
$4,212.48
($2,474.48)
($8,409.11)
($14,430.48)
($18,940.75)
($22,894.19)
Depreciation
Year
MCARS depreciation rate
Depreciation
Tax savings due to depreciation
1
15
15000
6000.00
3
25
21250
8500.00
3
18
11475
4590.00
4
13
6795.75
2718.30
5
9
4093.13
1637.25
6
9
3724.75
1489.90
7
9
3389.52
1355.81
Net present value of project = Present value of cash Inflow - Present value of cash outflow
= 100000 -50390
= 49610
Particulars
(at Y= 0) Amount
Cash outflow
$100,000
PVF (Y=0)
1
Present value of cash outflow
$100,000
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