Question

A company is considering the purchase of a large stamping machine that will cost $140,000, plus $6,500 transportation and $12,000 installation charges. It is estimated that, at the end of five years, the market value of the machine will be $50,000. The IRS has established that this machine will fall under a three-year MACRS class life category. The justifications for the machine include $35,000 savings per year in labor and $45,000 savings per year in reduced materials. The before-tax MARR is 20% per year, and the effective income tax rate is 40%. What is the after-tax equivalent annual worth of this investment over the five year period which ends with the sale of the machine?    (Do not enter a dollar sign $ with your answer.)

Answer 1

Cost Basis = 140000 + 6500 + 12000 = 158500

Annual savings = 35000 + 45000 = 80000

After tax MARR = 0.2 * (1 - 0.4) = 0.12 ~ 12%

Salvage value of 50000 at end of year 5 will be depreciation recapture as its a 3 yr MACRS property and BV after 4th yr is 0

Using Excel

Year	BTCF	MACRS Factor	Depreciation	Taxable income	Tax	ATCF
0	-158500.00					-158500.00
1	80000.00	0.3333	52828.05	27171.95	10868.78	69131.22
2	80000.00	0.4445	70453.25	9546.75	3818.70	76181.30
3	80000.00	0.1481	23473.85	56526.15	22610.46	57389.54
4	80000.00	0.0741	11744.85	68255.15	27302.06	52697.94
5	130000.00			130000.00	52000.00	78000.00
					NPW	82,554.10
					AW	22,901.31

Showing formula in excel

Year	BTCF	MACRS Factor	Depreciation	Taxable income	Tax	ATCF
0	-158500					=B61
1	80000	0.3333	=C62*-B$61	=B62-D62	=E62*0.4	=B62-F62
2	80000	0.4445	=C63*-B$61	=B63-D63	=E63*0.4	=B63-F63
3	80000	0.1481	=C64*-B$61	=B64-D64	=E64*0.4	=B64-F64
4	80000	0.0741	=C65*-B$61	=B65-D65	=E65*0.4	=B65-F65
5	=50000+80000			=B66-D66	=E66*0.4	=B66-F66
					NPW	=NPV(12%,G62:G66)+G61
					AW	=PMT(12%,5,-G67)