1. Aubie Tech wants to expand their current manufacturing process with a new ful
ID: 2783508 • Letter: 1
Question
1. Aubie Tech wants to expand their current manufacturing process with a new fully automated plastic molding machine. The machine costs $100,000 including shipping and installation fees. It falls into the MACRS 3-year class and it will have an estimated salvage value of $60,000 when sold after 2 years. The machine will be fully financed from a local bank. The payments are made at the end of each year, $59,169.81 annually for the next two years. The loan amortization schedule is given below. With the purchase of the machine, the company will generate $250,000 extra income per year, but considering the electricity usage, machine programming and regular maintenance, it will add expenses of $50,000 annually. Find the present worth of the project if MARR of the company is 15%. Is this expansion economically attractive? (Hint: You need to find after tax cash flows to figure the present worth of this project.) (60 points) Years Interest Principal Balance $100,000.00 1 $12,000.00 $47,169.81 $52,830.19 2 $6,339.62 $52,830.19 $0.00Explanation / Answer
MARR of the Company is 15%
_I_________________________________I________________________________I
Cash Flows at Cash Flows Cash Flows
0 year At the end of At the end of
1st Year 2nd Year
Cash Flows at the end of 1st year :-
for purchased Machine = $ 59,170 (Rounded off to no decimal places)
Net Cash Flows at the
End of 1st year (CF1) = 250000-50000-59170 = $ 140830.
Cash Flows at the end of 2nd year :-
for purchased Machine = $ 59,170 (Rounded off to no decimal places)
4. Proceeds from Sale of
Machine = $ 60,000
Net Cash Flows at the
End of 2nd year (CF2) = 250000- 50000- 59170 + 60000 = $ 200830.
Original Equation is PV = Expected Cash Flows / (1+ Discount Rate)^ Number of Periods
Where PV represents Present Value
Discount Rate = R
No. of Period = N
Present Worth of project when MARR is 15% :-
= CF1/(1+R)^1 + CF2/(1+R)^2
= 140830 / (1+0.15)^1 + 200830 / (1+0.15)^2
= $ 274,317 (Rounded off)
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