Please show steps to arrive at answer*** 1.) A machine costs $60 and requires $3
ID: 2642007 • Letter: P
Question
Please show steps to arrive at answer***
1.) A machine costs $60 and requires $35 in maintenance for each year of its three year life. After three years, this machine will be replaced. If the machine belongs in a 30% CCA class and has no salvage value, what is the EAC? Assume a tax rate of 34% and a discount rate of 14%.
2.) The machinery required for a three year project costs $20,000, belongs in a 15% CCA class, and will require a net working capital investment of $5,000 up-front. The project generates after-tax operating income of $11,500. The fixed assets will be sold for $2,000 at the end of the project. If the firm has a tax rate of 34% and a required return of 10%, what is the project NPV?
Explanation / Answer
(1) Computation of Equivalent Annual Cost(EAC) for the machine. We have,
Note: Annuity factor after tax = 14(1-34%) =9.24%
(2) Computation of project NPV. We have,
Total present value of cash inflow = $ 51,278
Cash outflow = 20,000 + 5,000 = $ 25,000
Project NPV = 51,278 - 25,000 = $ 26,278
Particulars Year 1 Year 2 Year3 Maintenace cost($) - 35.00 -35.00 -35.00 Salave value ($) 18.00 12.60 8.82 Net cash outflow for machine($) - 17.00 -22.40 -26.18 Annuity factor@9.24% 0.915 0.838 0.767 Equivalent Annual cost (EAC) - 18.58 - 26.73 -34.13