Show all work done and the steps taken to get answers. 1.) A company is consider
ID: 2765009 • Letter: S
Question
Show all work done and the steps taken to get answers.
1.)A company is considering the installation of a new machine that costs $150,000. The machine is expected to lead to new net income of $40,000 per year for the next five years. Using SL depreciation, $0 salvage value, and an effective income tax rate of 50%; determine the after-tax rate of return for this investment. If the company’s after-tax MARR rate is 10%, would this be a good investment or not?
2.) An auto supplier installed new equipment costing $1,050,000. The equipment generated new income averaging $300,000 per year, and its operating costs averaged $48,000 per year. The equipment was depreciated using the MACRS method, assuming a recovery period of 7 years and no salvage value. However, the equipment was kept in service for a total of 10 years, after which time a scrap dealer bought it for $60,000. The company uses an after-tax MARR rate of 8% per year and is in the 30% tax bracket. Determine the equipment’s after-tax net present worth over the 10-year service period.
Explanation / Answer
Answer 1 New Machine cost = $150000 Salvage value = $0 Useful life of machine = 5 years Depreciation per year based straight line method = (Cost - salvage value) / Useful life Depreciation per year based straight line method = (150000 - 0) / 5 = $30000 per year In $ Net Income 40000 Less : Depreciation 30000 Profit before tax 10000 Less : tax @ 50% 5000 Profit after tax 5000 After tax rate of return = Profit after tax / Investment = $5000 / $150000 = 3.33% per annum Company's MARR = 10% As MARR 10% is higher than after tax rate of return of 3.33% , it is not a good investment. Answer 2 Equipment Cost $10,50,000 Depreciation using MACRS method - Recovery Period 7 years Year Depreciation Rate Depreciation 1 14.29% $1,50,045 2 24.49% $2,57,145 3 17.49% $1,83,645 4 12.49% $1,31,145 5 8.93% $93,765 6 8.92% $93,660 7 8.93% $93,765 8 4.46% $46,830 Calculation equipment after tax net present worth over 10 year service period Year Income Operating Cost Depreciation Net Income Tax @30% Profit after tax PV Factor @ 8% Present Worth 1 $3,00,000 $48,000 $1,50,045 $1,01,955 $30,587 $71,369 0.925925926 $66,081.94 2 $3,00,000 $48,000 $2,57,145 -$5,145 $0 -$5,145 0.85733882 -$4,411.01 3 $3,00,000 $48,000 $1,83,645 $68,355 $20,507 $47,849 0.793832241 $37,983.68 4 $3,00,000 $48,000 $1,31,145 $1,20,855 $36,257 $84,599 0.735029853 $62,182.42 5 $3,00,000 $48,000 $93,765 $1,58,235 $47,471 $1,10,765 0.680583197 $75,384.46 6 $3,00,000 $48,000 $93,660 $1,58,340 $47,502 $1,10,838 0.630169627 $69,846.74 7 $3,00,000 $48,000 $93,765 $1,58,235 $47,471 $1,10,765 0.583490395 $64,630.02 8 $3,00,000 $48,000 $46,830 $2,05,170 $61,551 $1,43,619 0.540268885 $77,592.88 9 $3,00,000 $48,000 $0 $2,52,000 $75,600 $1,76,400 0.500248967 $88,243.92 10 $3,00,000 $48,000 $0 $2,52,000 $75,600 $1,76,400 0.463193488 $81,707.33 Residual Value $60,000 $0 $0 $60,000 $18,000 $42,000 0.463193488 $19,454.13 After tax net present worth $6,38,696.51