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Some new production machinery has a first cost of $100,000 and a useful like of 10...

Some new production machinery has a first cost of $100,000 and a useful like of 10 years. Its estimated operating and maintenance costs are $10,000 the first year, which will increase annually by $4000. The asset’s before-tax market value will be $50,000 at the end of the first year and then will decrease by $5000 annually. This property is a 7-year MACRS property. The company uses a 6% after tax MARR and is subject to a combined federal/state tax rate of 40%. Calculate the after tax cash flows. The spreadsheet also needs to be able to use WACC in place of a given interest rate. The spreadsheet needs to accommodate different tax rates, and must include ATCF for O&M and Depreciation and ATCFs of disposal if the equipment is sold in each of the 10 years. Combine these to Identify the optimal life.

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Expert Solution

Life in Yrs. BT-O&M AT-O&M Depn. Tax shield=Annual MACRS%*100000*40% MV ATCF on Sal Val. ATCFs for the yr. PV F at 6%(1/1.06^Yr.n) PV at 6% PV ofNet ATCF/P/A (1-1.06^-n)/0.06
1 2 3=2*(1-40%) 4 5 6(Table- 1) 7=6+4-2 8 9=7*8 10=P/A F 11=9/10
1 10000 6000 5716 50000 64284 64000 0.943396 60377.36 0.943396 64000
2 14000 8400 9796 45000 51488 52884 0.889996 47066.57 1.833393 25671.84
3 18000 10800 6996 40000 41492 37688 0.839619 31643.57 2.673012 11838.17
4 22000 13200 4996 35000 33496 25292 0.792094 20033.63 3.465106 5781.54
5 26000 15600 3572 30000 26924 14896 0.747258 11131.16 4.212364 2642.50
6 30000 18000 3568 25000 20356 5924 0.704961 4176.186 4.917324 849.28
7 34000 20400 3572 20000 13784 -3044 0.665057 -2024.43 5.582381 -362.65
8 38000 22800 1784 15000 9000 -12016 0.627412 -7538.99 6.209794 -1214.05
9 42000 25200 10000 6000 -19200 0.591898 -11364.5 6.801692 -1670.83
10 46000 27600 5000 3000 -24600 0.558395 -13736.5 7.360087 -1866.35
Optimal life will be 6 years, after which NPV of benefits is outweighed by costs.
Table-1
ATCFs of disposal if the equipment is sold in each of the 10 years
Year 1 2 3 4 5 6 7 8 9 10
Cost 100000 100000 100000 100000 100000 100000 100000 100000 100000 100000
Acc.Depn. 14290 38780 56270 68760 77690 86610 95540 100000 100000 100000
C/V 85710 61220 43730 31240 22310 13390 4460 0 0 0
Sal.Value 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000
Loss/(Gain) 35710 16220 3730 -3760 -7690 -11610 -15540 -15000 -10000 -5000
Tax saved 14284 6488 1492 -1504 -3076 -4644 -6216 -6000 -4000 -2000
Sal.V+Tx/S 64284 51488 41492 33496 26924 20356 13784 9000 6000 3000

ekkarill92 answered 3 months ago
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