Question
In: Economics
A computerized machining center has been proposed for a tool-manufacturing company. The new system costs $250,000...
A computerized machining center has been proposed for a tool-manufacturing company. The new system costs $250,000 and the company expects to borrow $100,000 at interest rate of 10% and paying for the remaining from its own funds. The loan of $100,000 is to be repaid in equal annual installments at 10% interest rate over eight years. Once the new system is installed, it will generate annual revenues of $125,000 and will require $23,500 in annual labor, $8,500 in annual material expenses, $2500 annual maintenance and another $9,000 in annual overhead (power and utility) expenses. The depreciation is based on straight line depreciation for 8 years. The company expects to phase out the facility at the end of 8 years, at which time it will be sold for $75,000. If the company’s MARR is 15% find the following: (1) The year-by-year after-tax net cash flow for the project at a 32% marginal tax rate; (2) The after-tax Net Present worth (NPW) of the project and (3) The internal rate of return
Solutions
Expert Solution
The detailed cashflow is in the table below. NPV, IRR have also been calculated. Explanation follows.
| Year | Self funds | Borrowed | EMI | Revenue | Labor | Material Expenses | Maintenance | Overhead | Depreciation | Salvage | Net Cashflow | After tax cashflow |
| 0 | -150000 | -100000 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | -250000 | -250000 |
| 1 | 0 | 0 | -18744 | 125000 | -23500 | -8500 | -2500 | -9000 | -21875 | 0 | 40881 | 27799.08 |
| 2 | 0 | 0 | -18744 | 125000 | -23500 | -8500 | -2500 | -9000 | -21875 | 0 | 40881 | 27799.08 |
| 3 | 0 | 0 | -18744 | 125000 | -23500 | -8500 | -2500 | -9000 | -21875 | 0 | 40881 | 27799.08 |
| 4 | 0 | 0 | -18744 | 125000 | -23500 | -8500 | -2500 | -9000 | -21875 | 0 | 40881 | 27799.08 |
| 5 | 0 | 0 | -18744 | 125000 | -23500 | -8500 | -2500 | -9000 | -21875 | 0 | 40881 | 27799.08 |
| 6 | 0 | 0 | -18744 | 125000 | -23500 | -8500 | -2500 | -9000 | -21875 | 0 | 40881 | 27799.08 |
| 7 | 0 | 0 | -18744 | 125000 | -23500 | -8500 | -2500 | -9000 | -21875 | 0 | 40881 | 27799.08 |
| 8 | 0 | 0 | -18744 | 125000 | -23500 | -8500 | -2500 | -9000 | -21875 | 75000 | 115881 | 78799.08 |
| NPV | -108585 | |||||||||||
| IRR | 1.77% |
The yearly installment of the borrowed 100000 will be 18744. That will be a negative cashflow each year. Only revenue will be positive rest all are costs, which are shown as negative. Net cashflow is the revenue left after removing all costs each year. After tax cashflow is .68*net cashflow, as there is 32% tax on net cashflow.
NPV is calculated by the formula =NPV(cashflow)+initial
investment.
IRR has been calculated by the formula =IRR(cashflows).
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