Question

A company is considering the purchase of a large stamping machine that will cost $185,000, plus $4,700 transportation and $9,300 installation charges. It is estimated that, at the end of five years, the market value of the machine will be $32,000. The IRS has established that this machine will fall under a three-year MACRS class life category. The justifications for the machine include $26,000 savings per year in labor and $36,000 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

The depreciation schedule under the three-year MACRS class life category is shown in the following table

The MACRS depreciation expense will be used upto year 3 and a switch to straight line method will be made in year 3 as it produces higher depreciation expense than MACRS method.

After tax MARR = Before tax MARR ( 1 - tax rate)

After tax MARR = 0.20 ( 1 - 0.40)

After tax MARR = 12%

The cash associated with the purchase of stamping machine is shown in the following table.

After-tax equivalent annual worth = After tax net present worth capital recovery factor

After tax net present worth = Present worth after tax cash flows + Present worth of after tax salvage value

After tax salvage value = Price - Tax ( Price - book value)

After tax salvage value = $ 32000 - 0.40 ( $ 32000 - 0)

After tax salvage value = $ 19200

After tax net present worth = $ 5521.46

After-tax equivalent annual worth =  After tax net present worth   capital recovery factor

After-tax equivalent annual worth = $ 5521.46 (A/P, 12%, 5 years)

After-tax equivalent annual worth = $ 5521.46 0.2774 =

After-tax equivalent annual worth = 1531.65