Question

An auto-part manufacturing company is considering the purchase of an industrial robot to do spot welding, which is currently done by skilled labor. The initial cost of the robot is $250,000, and the annual labor savings are projected to be $125,000. If purchased, the robot will be depreciated under MACRS as a seven-year recovery property. This robot will be used for five years after which the firm expects to sell it for $50,000. The company’s marginal tax rate is 25% over the project period.

Determine the net after-tax cash flows for each period over the project life. Assume MARR=15%.

Answer 1

Solution :-

Working Notes :-

Machine Cost = $250,000

Total Dep charged in 5 years = $194,225

Book Value after 5 years = $250,000 - $194,225 = $55,775

Selling Price = $50,000

Loss on Sale of Machine = $55,775 - $50,000 = $5,775

Tax Saving in Loss on Sale of Machine = $5,775 * 25% = $1,443.75

Net Cash flow of after tax Salvage Value = ( $50,000 + $1,443.75 ) = $51,443.75

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