Two alternative replacement machines are described below that are being consider
ID: 2645681 • Letter: T
Question
Two alternative replacement machines are described below that are being considered to replace a current one that has no salvage value. The present machine must be replaced and the replacement will not have any effect on quantity produced, quantity sold, revenue, nor S.G.& A. (except depreciation). The cost of the replacement machine will be depreciated using 5-year MACRS. The project evaluation time span should be 3 years. Machine A, while less expensive at $100,000, only has a life span of 3 years. Its salvage value at the end of three years is $7,500. The annual COGS using this machine will be $8,500. Machine B is more expensive at $150,000 but will last 6 years and has a lower annual operating costs. Its worth (salvage value) at the end of three years is $60,000. The annual COGS using this machine will be $5,000. Performa a financial analysis to determine the better alternative from a financial perspective. Use a MARR of 13%, income tax rate of 30% and a capital gains tax rate of 15%. Data block MARR= 13.00% Income Tax rate 30.0% Capital Gains rate 15.0% Time span 3 years Machine A B Purchase Cost $100,000 $150,000 Salvage Value $7,500 $60,000 end of year-3 Annual COGS $8,500 $5,000 3-year MACRS Year 1 2 3 Percentage 33.33% 44.45% 14.81% Two alternative replacement machines are described below that are being considered to replace a current one that has no salvage value. The present machine must be replaced and the replacement will not have any effect on quantity produced, quantity sold, revenue, nor S.G.& A. (except depreciation). The cost of the replacement machine will be depreciated using 5-year MACRS. The project evaluation time span should be 3 years. Machine A, while less expensive at $100,000, only has a life span of 3 years. Its salvage value at the end of three years is $7,500. The annual COGS using this machine will be $8,500. Machine B is more expensive at $150,000 but will last 6 years and has a lower annual operating costs. Its worth (salvage value) at the end of three years is $60,000. The annual COGS using this machine will be $5,000. Performa a financial analysis to determine the better alternative from a financial perspective. Use a MARR of 13%, income tax rate of 30% and a capital gains tax rate of 15%. Data block MARR= 13.00% Income Tax rate 30.0% Capital Gains rate 15.0% Time span 3 years Machine A B Purchase Cost $100,000 $150,000 Salvage Value $7,500 $60,000 end of year-3 Annual COGS $8,500 $5,000 3-year MACRS Year 1 2 3 Percentage 33.33% 44.45% 14.81%Explanation / Answer
For Machine A
Sl. No.
Year
0
1
2
3
1
initial cost
100000
2
COGS
8500
8500
8500
3
Total COGS after tax=COGS*(1-0.3)
5950
5950
5950
4
Dep
33330
44450
14810
5
Tax saving due to dep=(Dep*0.3)
9999
13335
4443
6
Remaining book value=initial-Acc dep
7410
7
Slavage Value
7500
8
Capital gain(Salvage value-Book Value)
90
9
Captial gain after tax @15%
76.5
10
Net Cost(1+3-5-9)
100000
-4049
-7385
1430.5
11
P.V @ 13%
100000
-3583.19
-5783.54
991.4083
12
N.P.V of cost
91624.68
For Machine B
Sl. No.
Year
0
1
2
3
1
initial cost
150000
2
COGS
5000
5000
5000
3
Total COGS after tax=COGS*(1-0.3)
3500
3500
3500
4
Dep
49995
66675
22215
5
Tax saving due to dep=(Dep*0.3)
14998.5
20002.5
6664.5
6
Remaining book value=initial-Acc dep
11115
7
Slavage Value
60000
8
Capital gain(Salvage value-Book Value)
48885
9
Captial gain after tax @15%
41552.25
10
Net Cost(1+3-5-9)
150000
-11498.5
-16502.5
-44716.8
11
P.V @ 13%
150000
-10175.7
-12923.9
-30991
12
N.P.V of cost
95909.51
Since Machine A has lower NPV for Net Cost, Machine A is preferred
Sl. No.
Year
0
1
2
3
1
initial cost
100000
2
COGS
8500
8500
8500
3
Total COGS after tax=COGS*(1-0.3)
5950
5950
5950
4
Dep
33330
44450
14810
5
Tax saving due to dep=(Dep*0.3)
9999
13335
4443
6
Remaining book value=initial-Acc dep
7410
7
Slavage Value
7500
8
Capital gain(Salvage value-Book Value)
90
9
Captial gain after tax @15%
76.5
10
Net Cost(1+3-5-9)
100000
-4049
-7385
1430.5
11
P.V @ 13%
100000
-3583.19
-5783.54
991.4083
12
N.P.V of cost
91624.68