1 Zoon, a large, profitable corporation, is considering adding some automatic eq

Question

1 Zoon, a large, profitable corporation, is considering adding some automatic equipment to its production facilities. The equipment costs $120,000 and will produce an initial annual benefit of $29,000, but the benefits are expected to decline $3000 per year. The firm uses sum-of-years-digits depreciation over the 3-year useful life of the equipment which has a $12,000 salvage value. Using present worth analysis, determine whether the equipment should be purchased if the after-tax MARR is 6%. Assume that the equipment can be sold for its S12,000 salvage value at the end of the 3 years. Also, assume a 46% income tax rate. (30 marks)

Explanation / Answer

NPV computation table Benefits available Present value factor (9.37%) note -1 Discounted cash flow Deprectaion (After tax adjustment) year1 29000 0.91 26515.50 12896.65 year2 +29000-3000 26000 0.84 21809.65 23663.58 year3 +26000-3000 23000 0.76 17580.58 32564.57 65905.72 69124.80 135030.53 Cost of machine= -120000.00 NPV= 15030.53 Conclusion :- As NPV of project is positive , it should be accepted. Salvage value = 12000 Note- Depreciation is not a cash expenditure Note -1 pre tax rate %= 6%*(100/64)= 9.375 Say 9.37% Note -2 Depreciation Depreciable amount=120000-12000 108000 Let year 1 depreciation be =x so as per no-of -digit method depreciation be as follows :- 1 2 3 4 5(depreciation) Tax adjustment PVIF(9%) DEPRECATION 2*3 x=21964.61 (1-0.46)=0.64 year1 0.92 x 0.917x 20151.02 12896.65 year2 0.84 2x 1.68x 36974.35 23663.58 year3 0.77 3x 2.32x 50882.13 32564.57 4.917x =108000 69124.80 then x = 21964.61257

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