Problem 17.049: Calculate the after-tax AW of two alternatives A European candy
ID: 2784153 • Letter: P
Question
Problem 17.049: Calculate the after-tax AW of two alternatives A European candy manufacturing plant manager must select a new irradiation system to ensure the safety of specific ingredients while being economical. The two alternatives available have the following estimates: System First Cost, $ FBT, $ per Year Life, Years 150,000 60,000 3 80,000 20,000 5 The company is in the 35% tax bracket and assumes classical straight line depreciation for alternative comparisons performed at an after-tax minimum acceptable rate of return (MARR) of 8% per year. A salvage value of zero is used when depreciation is calculated; however, system B can be sold after 5 years for an estimated 8% of its first cost. System A has no anticipated salvage value. Determine which is more economical using an annual worth (AW) analysis worked by hand. The annual worth analysis for system A is determined to be $ The annual worth analysis for system B is determined to be $ System (Click to select) is selected.Explanation / Answer
calculation of cash flows after tax A B CFBT 60000 20000 Less- Depreciation 50000 16000 10000 4000 less: Tax @35% 3500 1400 profit after tax 6500 2600 Add: Depreciation 50000 16000 CFAT 56500 18600 PV of post tax salvage value of B Salvage Value 8% of80000 6400 Post tax Value 4160 Present Value of Post tax SV 4160/(1.08)^5 2831.226 Net present value A B CFAT 56500 18600 Annuity Factor 2.5771 3.9927 Total Pv of cash flows 145606.2 74264.22 Add: PV OF Salvage value 0 2831.226 Total Inflows 145606.2 77095.45 Less: Initial Investment 150000 80000 NPV -4393.85 -2904.55 Annual worth A B NPV -4393.85 -2904.55 Annuity Factor 2.5771 3.9927 AW -1704.96 -727.466 Alternative B is economical as less negative NPV Althoug both alternatives are not viable but as company must select one it should be B Thanks in advance… Please provide feedback.. :-)