3. Nelson Corporation purchased a plasma cutting workstation for $600,000 at the

Question

3. Nelson Corporation purchased a plasma cutting workstation for $600,000 at the end of Year 0. The machine will be used for 5 years, and is expected to have a salvage value of S120,000. Use of the machine will generate $200,000 a year in revenue and $70,000 a year in operation expenses for labor and electricity. The machine qualifies for 3-year MACRS (33.33%, 44.44%, 14.82%, 7.41%). Nelson is profitable in its other operations, pays federal corporate income taxes at the 34% rate, and has a MARR of 8%. Nelson uses $200,000 of its own funds to pay for the machine, borrows $400,000 from a commercial lender at 10% interest, and plans to repay it with 3 uniform payments which are shown below, with the first payment being made at the end of Year 1. Find the Net Cash Flow each year:

Explanation / Answer

Amount borrowed=$400,000

The loan is repaid in three equal annual instalments.

EMI is arrived by using the formula in excel= pmt(rate,nper,pv)

Here rate=10%

nper =3

pv= $400,000 which is the loan amount.

Substituting the values in the formula pmt(10%,3,400,000) =$160,845.92 rounded to $160.846. So, the ammrotization table is arrived as follows:

As the interest expense is arrived from the above table the same is deducted from the net revenues generated from operations.

Also MACRS is calculated as follows:

Column headings explaining the formula using which the value in that respective column is arrived is mentioned below:

In the above table let us refer to second column as (A) it is derived by deducting operating expenses of $70,000 from the revenues generated $200,000, net revenue =$200,000 -$70,000 =$130,000.

Year Interest (A=D*10%) Owed (B=D of previous row +A ) Payment ( C) Balance (D=D of theprevious row - E) Prinipal repaid E =C-A 0 400000 1 40000 440000 160846 279154 120846 2 27915 307069 160846 146223 132931 3 14622 160846 160846 0 146224

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