An automotive supplier will spend $850,000 for special press tooling for a new p

Question

An automotive supplier will spend $850,000 for special press tooling for a new part. The tooling will last for the life of a four year model run, and will be scrapped at the end of the run (i.e., no significant salvage value). Depreciation is on MACRS 3-year schedule. The supplier will mike $300,000 per year in additional profit from producing the part after covering all costs. Compute the pretax and after-tax payback periods. Use a tax rate of 40%. Is the project worthwhile? After-tax MARR is 15%.

Explanation / Answer

Amount (in $) Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Total Cost of Machine -850000.00 -850000.00 Revenue 0.00 300000.00 300000.00 300000.00 300000.00 1200000.00 Less: Depreciation 0.00 283333.00 377778.00 125926.00 62963.00 850000.00 Profit before Tax 16667.00 -77778.00 174074.00 237037.00 350000.00 Less: Tax 6666.80 0.00 69629.60 94814.80 140000.00 Profit after Tax 10000.20 -77778.00 104444.40 142222.20 210000.00 Add: Depreciation 0.00 283333.00 377778.00 125926.00 62963.00 850000.00 Profit after Tax before Depreciation 293333.20 300000.00 230370.40 205185.20 1060000.00 Present Value using MARR 15% -850000.00 255072.35 226843.10 151472.28 117315.30 750703.03 NPV using MARR 15% -99296.97 IRR of the Project -5.47% Pre Tax Payback Period= 2+(250000/300000)= 2.83 years Post Tax Payback Period= 3+(26296.4/205185.2)= 3.128 years b) Since the IRR

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