Question

(IN EXCEL PLEASE/ With formulas shown) Engineering economics

A firm is considering purchasing a machine that costs ​$65000. It will be used for six​ years, and the salvage value at that time is expected to be zero. The machine will save ​$35000 per year in​labor, but it will incur ​$12000 in operating and maintenance costs each year. The machine will be depreciated according to​ five-year MACRS. The​ firm's tax rate is 40%, and its​ after-tax MARR is 15%. Should the machine be​ purchased?

Answer 1

Depreciation rate under MACRS

= 1 / Useful life * 200%

= 1 / 5 * 200%

= 40%

Depreciation Table:

	200% declining balance	Straight line	Current Depreciation	Accumulated Depreciation	Book Value
Year 1	$                                13,000	$               6,500	$                 13,000	$                13,000	$               52,000
Year 2	$                                20,800	$             11,556	$                 20,800	$                33,800	$               31,200
Year 3	$                                12,480	$               8,914	$                 12,480	$                46,280	$               18,720
Year 4	$                                  7,488	$               7,488	$                   7,488	$                53,768	$               11,232
Year 5	$                                  4,493	$               7,488	$                   7,488	$                61,256	$                 3,744
Year 6	$                                  1,498	$               3,744	$                   3,744	$                65,000	$                        -

Net Present Value:
	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Savings in Labor	$35,000	$35,000	$35,000	$35,000	$35,000	$35,000
Less: Operating and Maintenance Costs	$12,000	$12,000	$12,000	$12,000	$12,000	$12,000
Less: Depreciation (based on Depreciation table)	$13,000	$20,800	$12,480	$7,488	$7,488	$3,744
Net Income Before Taxes	$10,000	$2,200	$10,520	$15,512	$15,512	$19,256
Less: Taxes @ 40%	$4,000	$880	$4,208	$6,205	$6,205	$7,702
Net Income After Taxes	$6,000	$1,320	$6,312	$9,307	$9,307	$11,554
Add: Depreciation	$13,000	$20,800	$12,480	$7,488	$7,488	$3,744
Cash Flow After Taxes	$19,000	$22,120	$18,792	$16,795	$16,795	$15,298
PVF (15%)	0.869565217	0.756143667	0.657516232	0.571753246	0.497176735	0.4323276
Present Value of Net Cash Inflows	$16,521.74	$16,725.90	$12,356.05	$9,602.71	$8,350.18	$6,613.57
Total Present Value of Net Cash Inflows	$70,170.15
Less: Amount of Investment	$65,000
Net Present Value	$5,170.15

Since net present value is positive, the machine should be purchased.

Formulae used in the above calculations are presented below for your reference:

Depreciation Table:

NPV: