A new Stout engineer who just was hired by Machine Excellence is pushing for a b
ID: 2806552 • Letter: A
Question
A new Stout engineer who just was hired by Machine Excellence is pushing for a brand new laser machining center. He insists that it is a money maker from the first day. He did not figure the deprecation and the after taxes cash flow (CFAT). Give this rookie engineer a little intelligent guidance here on the CFAT for a ROR analysis of the new laser equipment. Here are the figures for the production machining equipment for making detailed laser signs and complex shapes. Calculate the CFAT and ROR for the end of 6 years. Answer the question: "Is the investment economically viable"?
Depr method: MACRS GDS
Class life: 5 Years
Depr recapture: Taxed as TI
First cost: $550,000
Gross Income:$250,000
Expenses: $80,000
Salvage: 0 in year 6
Effective Tax Rate: 45%
After-tax MARR: 12% per year compounded quarterly
Explanation / Answer
Computation of CFAT:
Year
BTCF
Depreciation
Income
Taxes at 45%
Income after tax
CFAT = Income after tax + depreciation
0
(550,000)
-
(550,000)
(550,000)
1
170,000
(110,000)
60,000
(27,000)
33,000
143,000
2
170,000
(176,000)
(6,000)
2,700
(3,300)
172,700
3
170,000
(105,600)
64,400
(28,980)
35,420
141,020
4
170,000
(63,360)
106,640
(47,988)
58,652
122,012
5
170,000
(63,360)
106,640
(47,988)
58,652
122,012
6
170,000
(31,680)
138,320
(62,244)
76,076
107,756
Given after tax MARR = 12%,
Year
CFAT
PV at 12%
PV of CFAT
0
(550,000)
1
(550,000)
1
143,000
0.892857
127,679
2
172,700
0.797194
137,675
3
141,020
0.71178
100,375
4
122,012
0.635518
77,541
5
122,012
0.567427
69,233
6
107,756
0.506631
54,593
NPW
17,095
ROR
13%
Decision: Invest in this project because NPW is positive.
Year
BTCF
Depreciation
Income
Taxes at 45%
Income after tax
CFAT = Income after tax + depreciation
0
(550,000)
-
(550,000)
(550,000)
1
170,000
(110,000)
60,000
(27,000)
33,000
143,000
2
170,000
(176,000)
(6,000)
2,700
(3,300)
172,700
3
170,000
(105,600)
64,400
(28,980)
35,420
141,020
4
170,000
(63,360)
106,640
(47,988)
58,652
122,012
5
170,000
(63,360)
106,640
(47,988)
58,652
122,012
6
170,000
(31,680)
138,320
(62,244)
76,076
107,756
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