Consider the information given in question 6. If the inflation rate is 8% every

Question

Consider the information given in question 6. If the inflation rate is 8% every year, (a) Determine the net after-tax cash flow over the project life.
(b) Find the net present worth under MARR 15%.

An industrial engineer proposed the purchase of a scanning equipment for the company's warehouse and weave rooms. The engineer felt that the purchase would provide a better system of locating cartons in the warehouse by recording the locations of the cartons and storing the data in the computer. The estimated investment, annual operating and maintenance costs, and expected annual savings are as follows: 6. Cost of equipment and installation: $65,500. Project life: 6 years. Expected salvage value: $3,000. Investment in working capital (fully recoverable at the end of the project life): $10,000. Expected annual savings on labor and materials: $55,800. Expected annual expenses: $8,120. Depreciation method: 5-year MACRS. . · · The firm's marginal tax rate is 35%. Determine the net after-tax cash flows over the project life. (a) Compute the IRR for this investment. (b) Is the project acceptable under MARR 18%?

Explanation / Answer

Calculation of net after tax cash flows over the project life Year 0 1 2 3 4 5 6 Cost of equipment & Installation -$65,500.00 Investment in working capital -$10,000.00 Savings on Labour & material cost $55,800.00 $55,800.00 $55,800.00 $55,800.00 $55,800.00 $55,800.00 Tax @ 35% on savings on Labour & Material cost -$19,530.00 -$19,530.00 -$19,530.00 -$19,530.00 -$19,530.00 -$19,530.00 Expenses -$8,120.00 -$8,120.00 -$8,120.00 -$8,120.00 -$8,120.00 -$8,120.00 Tax saving @ 35% on Expenses $2,842.00 $2,842.00 $2,842.00 $2,842.00 $2,842.00 $2,842.00 Tax saving @ 35% on Depreciation $4,585.00 $7,336.00 $4,401.60 $2,640.96 $2,640.96 $1,320.48 Recovery of working capital $10,000.00 Salvage Value $3,000.00 Tax @ 35% on salvage value -$1,050.00 Net After Tax Cash flows -$75,500.00 $35,577.00 $38,328.00 $35,393.60 $33,632.96 $33,632.96 $44,262.48 Answer a Calculation of IRR of the project Year Cash flows 0 -$75,500.00 1 $35,577.00 2 $38,328.00 3 $35,393.60 4 $33,632.96 5 $33,632.96 6 $44,262.48 IRR of the investment = 42.31% Answer b The project is acceptable under MARR 18% as the IRR of the project is greater than minimum acceptable rate of return. Working Calculation of depreciation on Equipment using 5 Year MACRS Year Capitalised Cost Depreciation rate Depreciation Tax saving @ 35% 1 $65,500.00 20% $13,100.00 $4,585.00 2 $65,500.00 32% $20,960.00 $7,336.00 3 $65,500.00 19.20% $12,576.00 $4,401.60 4 $65,500.00 11.52% $7,545.60 $2,640.96 5 $65,500.00 11.52% $7,545.60 $2,640.96 6 $65,500.00 5.76% $3,772.80 $1,320.48

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