The Norcross Fiber Company is considering automating its piece-goods screen-prin

Question

The Norcross Fiber Company is considering automating its piece-goods screen-printing system at a cost of $26,000. The firm expects to phase out the new printing system at the end of 5 years due to changes in style. At that time, the firm could scrap the system for $6,000 in today's dollars. The expected net savings (revenue - expenses) due to automation also are in today's (constant) dollars: Year 1 $22,000; Year 2 $19,000; Years 3-5 $14,000. The system qualifies as a 5-year MACRS property and will be depreciated accordingly. The general inflation rate over the next 5 years is 6% per year. Assume the net savings and the scrap value are subject to this inflation rate. The firm's inflation-free MARR is 11%. The firm's tax rate is 30%. What is the net present worth of this automation system?

CORRECT ANSWER IS 25,713

Explanation / Answer

A / 1 B C D E F G H I 2 Period Cashflow Inflation@6% 3 0 -$26,000 -$26,000 -$26,000 4 1 $22,000 $20,755 $14,528.30 5 2 $19,000 $16,910 $11,836.95 6 3 $14,000 $11,755 $8,228.27 7 4 $14,000 $11,089 $7,762.52 8 5 $14,000 $10,462 $7,323.13 9 10 Total: $57,000.00 $44,970.25 11 12 Life 5 years 13 14 Period Cashflow remove 11%discount Depreciation Income before tax Tax@30% Operating Cash flow Inflation@6%+discount11% 0 -$26,000 -$26,000.00 0 -$26,000 1 1 $22,000 $24,420.00 $5,200.00 $19,220.00 $5,766.00 $18,654.00 $15,944 2 2 $19,000 $23,409.90 $8,320.00 $15,089.90 $4,526.97 $18,882.93 $13,794 3 3 $14,000 $19,146.83 $4,992.00 $14,154.83 $4,246.45 $14,900.38 $9,303 4 4 $14,000 $21,252.99 $2,995.20 $18,257.79 $5,477.34 $15,775.65 $8,419 5 5 $14,000 $23,590.81 $4,492.50 $19,098.31 $5,729.49 $17,861.32 $8,147 6 5 $6,000 $10,110.35 $0.00 0 0 $10,110.35 $4,611 7 Total: $63,000.00 $34,218.05 8 9 Calculation of Depreciation under MACR 10 Year Depreciation Formula 11 1 $5,200 =26000*1/5*200%*0.5 12 2                 8,320 =(26000-C26)*1/5*200% 13 3                 4,992 =(26000-C27-C26)*1/5*200% 14 4                 2,995 =(26000-C28-C27-C26)*1/5*200% 15 5                 2,995 note A 16 5                 1,498 =C30*0.5 17 Total:               26,000 18 Note A: As the MARCS method giving lower Depreciation compared to straightline, taken straigt line only 19 Total depreciation till 4 Years $21,507 20 Balance depreciation to be done in 1.5 years                 4,493 21 Hence for 1 year shall be $2,995

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