Problem 7-33 (algorithmic) Question Help Your company has purchased equipment (f
ID: 2532449 • Letter: P
Question
Problem 7-33 (algorithmic) Question Help Your company has purchased equipment (for $52,000) that will reduce materials and labor costs by S16,000 each year for N years. After N years, there will be no further need for the machine, and because the machine is specially designed, it will have no MV at any time. The IRS, however, has ruled that you must depreciate the equipment on a SL basis with a tax life of four years. If the effective income tax rate is 35%, what is the minimum number of years your firm must operate the equipment to earn 10% per year after taxes on its investment? Click the icon to view the interest and annuity table for discrete compounding when the MARR is 10% per year Your firm must operate the equipment for minimum | | years to earn 10% per year after taxes on its investment. (Round your answer up to the nearest whole number.)Explanation / Answer
Answer: 4.50 years Calculation and explanation: After tax savings in labor costs = 16000*(1-0.35) = 10400 Depreciation tax shield = (52000/4)*0.35 = 4550 Annual after tax cash inflows 14950 To earn 10% minimum, the NPV = 0. Hence, -52000+14950*PVIFA(10,n) = 0 Solving for n, we have 52000/14950 = PVIFA(10,n) = 3.47826 The interest factor for 10% discount rate *for n = 4 = 3.16987 *for n = 5 = 3.79079 The required n falls between 4 years and 5 years. The exact value of n = 4+(3.47826-3.16987)/(3.79079-3.16987) = 4.50