A granary has two options for a conveyor used in the manufacture of grain for tr
ID: 2724423 • Letter: A
Question
A granary has two options for a conveyor used in the manufacture of grain for transporting, filling, or emptying. One conveyor can be purchased and installed for $100,000 with $3,500 salvage value after 16 years. The other can be purchased and installed for $105,000 with $5,000 salvage value after 16 years. Operation and maintenance for each is expected to be $17,000 and $15,500 per year, respectively. The granary uses MACRS-GDS depreciation, has a marginal tax rate of 40%, and has a MARR of 9% after taxes.
Determine which alternative is less costly, based upon comparison of after-tax annual worth.
Please complete in Excel AND upload to http://tempsend.com/ (Select 1 Week) or any upload site you like. Hightlight answer. I will make sure to give instant postive feedback
Explanation / Answer
The following assumption are taken to calculate NPV of conveyor
the cost of investment is $100,000
the depreciation taken is MACRS 15 year convention
the annual cost or cash outflow is $ 17,000
the tax rate is 40%
the cost of capital is 9%
the salvage value is $3,500
the net present value is difference between present value of cash inflow and cash outflow .
the calculation of NPV of conveyor cost $100,000
The following assumption are taken to calculate NPV of conveyor
the cost of investment is $105,000
the depreciation taken is MACRS 15 year convention
the annual cost or cash outflow is $ 15,500
the tax rate is 40%
the cost of capital is 9%
the salvage value is $5000
the net present value is difference between present value of cash inflow and cash outflow .
the calculation of NPV of conveyor cost $105,000
The total cost when equipment is purchases at $100,000 at 9% cost of capital for 16 years and salvage value of $3,500 is $240,432
The total cost when equipment is purchases at $105,000 at 9% cost of capital for 16 years and salvage value of $5,000 is $227,585 hence it is less costly
NPV calculation year equipment cost dep rate % Depreciation of new asset MACRS 15 year schedule operation and maintenance cost savings before tax tax @.40 savings after tax add -: deprecition annual cash inflow pV factor @12% cash inflow at present value (100,000) 1 - 1 5 (5,000) (17,000) (22,000) - (22,000) 5,000 (17,000) 0.91743 (15,596.33) 2 9.5 (9,500) (17,000) (26,500) - (26,500) 9,500 (17,000) 0.84168 (14,308.56) 3 8.55 (8,550) (17,000) (25,550) - (25,550) 8,550 (17,000) 0.77218 (13,127.12) 4 7.7 (7,700) (17,000) (24,700) - (24,700) 7,700 (17,000) 0.70843 (12,043.23) 5 6.93 (6,930) (17,000) (23,930) - (23,930) 6,930 (17,000) 0.64993 (11,048.83) 6 6.23 (6,230) (17,000) (23,230) - (23,230) 6,230 (17,000) 0.59627 (10,136.54) 7 5.9 (5,900) (17,000) (22,900) - (22,900) 5,900 (17,000) 0.54703 (9,299.58) 8 5.9 (5,900) (17,000) (22,900) - (22,900) 5,900 (17,000) 0.50187 (8,531.73) 9 5.91 (5,910) (17,000) (22,910) - (22,910) 5,910 (17,000) 0.46043 (7,827.27) 10 5.9 (5,900) (17,000) (22,900) - (22,900) 5,900 (17,000) 0.42241 (7,180.98) 11 5.91 (5,910) (17,000) (22,910) - (22,910) 5,910 (17,000) 0.38753 (6,588.06) 12 5.9 (5,900) (17,000) (22,900) - (22,900) 5,900 (17,000) 0.35553 (6,044.09) 13 5.91 (5,910) (17,000) (22,910) - (22,910) 5,910 (17,000) 0.32618 (5,545.04) 14 5.9 (5,900) (17,000) (22,900) - (22,900) 5,900 (17,000) 0.29925 (5,087.19) 15 5.91 (5,910) (17,000) (22,910) - (22,910) 5,910 (17,000) 0.27454 (4,667.15) 16 2.95 (2,950) (17,000) (19,950) - (19,950) 2,950 (17,000) 0.25187 (4,281.79) 100 -100000 100000 Total value of cash inflow at PV (141,313) Present value of cash inflows for 16 years (141,313) present value of scrap value at end of 16 years (3500 x 0.25187) 882 present value of total cash inflow (140,432) less present value of cash outflow equipment 100000 Total cash outflow 100000 Net NPV (240,432)