Please show all work: A company is considering the acquisition of production equ

Question

Please show all work:

A company is considering the acquisition of production equipment which will reduce both labor and materials costs. The cost is $100,000 and it will be depreciated on a straight-line basis down to $0. The useful life of the equipment is five years, and it will have a $20,000 market value at the end of five years. Operating costs will be reduced by $30,000 in the first year and the savings will increase by $5,000 per year in years 2, 3, and 4. Due to increased maintenance costs, savings in year five will be $10,000 less than the year four savings. The equipment will also reduce net working capital by $5,000 throughout the life of the project. The firm’s tax rate is 35 percent and the required return is 16 percent. Should the firm purchase this production equipment?

Explanation / Answer

Ans) Particulars Year-0 Year-1 Year-2 Year-3 Year-4 Year-5 NPV Investment $      (100,000) Less Operating Cost Saving $         30,000 $         35,000 $         40,000 $         45,000 $         35,000 Loss do to tax saving $       (10,500) $       (12,250) $       (14,000) $       (15,750) $       (12,250) Depreciation Tax Saving on Depreciation $            7,000 $            7,000 $            7,000 $            7,000 $            7,000 working capital saving $            5,000 Salvage Value after deduction of Tax $         13,000 Net cash in flow $      (100,000) $         26,500 $         29,750 $         33,000 $         36,250 $         47,750 Present value of cash flow 1 0.862 0.743 0.641 0.552 0.476 Discounted Cash flow $      (100,000) $         22,845 $         22,109 $         21,142 $         20,021 $         22,734 $    8,851 The Company can purchse the equipment

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