Problem 10-1 (algorithmic) Question Help * A firm is considering purchasing a ma

Question

Problem 10-1 (algorithmic) Question Help * A firm is considering purchasing a machine that costs $68,000. It will be used for six years, and the salvage value at that time is expected to be zero. The machine will save $42,000 per year in labor, but it will incur $11,000 in operating and maintenance costs each year. The machine will be depreciated according to five-year MACRS. The firm's tax rate is 35%, and its after-tax MARR is 18%. Should the machine be purchased? Click the icon to view the MACRS depreciation schedules Click the icon to view the interest factors for discrete compounding when is 18% per year. The present worth of the project is s(Round to the nearest dollar.)

Explanation / Answer

Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Labor savings 42,000.00 42,000.00 42,000.00 42,000.00 42,000.00 42,000.00 Less: Operating costs 11,000.00 11,000.00 11,000.00 11,000.00 11,000.00 11,000.00 Depreciation 13,600.00 21,760.00 13,056.00 7,833.60 7,833.60 3,916.80 Total costs 24,600.00 32,760.00 24,056.00 18,833.60 18,833.60 14,916.80 Net savings 17,400.00 9,240.00 17,944.00 23,166.40 23,166.40 27,083.20 Tax expense 6,090.00 3,234.00 6,280.40 8,108.24 8,108.24 9,479.12 After tax savings 11,310.00 6,006.00 11,663.60 15,058.16 15,058.16 17,604.08 Add depreciation 13,600.00 21,760.00 13,056.00 7,833.60 7,833.60 3,916.80 Cash flow after tax 24,910.00 27,766.00 24,719.60 22,891.76 22,891.76 21,520.88 Discount factor 0.84745763 0.718184 0.608631 0.515789 0.437109216 0.370431539 Present value 21,110.17 19,941.11 15,045.11 11,807.32 10,006.20 7,972.01 Total present value of future cash flows 85,881.92 Less investment 68,000.00 Present worth 17,881.92

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