The Mowbot Company is considering two options for tooling to upgrade a process l
ID: 2616339 • Letter: T
Question
The Mowbot Company is considering two options for tooling to upgrade a process line. Note that doing nothing is also an option. Option A would require the purchase of special tooling at a cost of $480,000.. The upgraded line would generate cost savings of $216,000 per year. be no salvage value on the tooling, which would be scrapped at the end of four years. The product life cycle would run four years, and the tooling would be depreciated on a MACRS three-year schedule. There would Option 8 would also require the purchase of special tooling at a cost of $375,000, This upgrade would produce $144.000per year in cost savings. The product life cycle would also run four years, and the tooling depreciated on a MACRS three-year schedule. In this case there would be a salvage value of $100,000 for the tooling at the end of four years. The combined income tax rate for Mowbot is 22.98%. After tax MARR is 25%. Perform the appropriate calculation of after tax cash flow using the following page, and answer the following: 1. What is the pretax rate of return for option A? (20 points) 2. What is the after tax rate of return for option A? (25 points) 3. What is the pretax rate of return for option B? (20 points) 4. What is the after tax rate of return for option B? (25 points) 5. Should you recommend Option A, Option B, or doing nothing? (15 points) * If your calculator will not compute IRR, show the net present value of the project at the MARRExplanation / Answer
Option A: The after tax cash flow and NPV at an MARR of 25% for Option A is as shown below in the table:
1. Pretax rate of return = Total profit before tax = 384000.
Average annual pretax return = 384000/4 = 96000
Total pretax return (option A) = 96000/480000 = 20%
2. Total after tax return = 295,756.80. Average return = 295,756.80/4 = 73,939.2
Total after tax return (Option A) = 73939.2/480000 = 15.40%
Now, we calculate the NPV for Option B
3. Total pre tax return = 301,000. Average return = 301000/4 =75250
Pretax return for Option B = 75250/375000 = 20%
4. Total after tax return = 231.830.2. Average return = 231830.2/4 =57957.55
After tax return for B = 57957.55/375000 =15.45%
5. We should "DO NOTHING" since the NPV of both option A and B is negative
Year 0 1 2 3 4 Initial Cost -480000 Cost Savings 216000 216000 216000 216000 Depreciation 33.33% 44.45% 14.81% 7.41% Depreciation Amt -159984 -213360 -71088 -35568 Profit before tax 56016 2640 144912 180432 Taxes at 22.98% -12872.5 -606.672 -33300.8 -41463.3 Profit after tax 43143.52 2033.328 111611.2 138968.7 Add back depreciation 159984 213360 71088 35568 After tax cash flow -480000 203127.5 215393.3 182699.2 174536.7 NPV at 25% $ -14,614.01