The Sailwinds Manufacturing Company is considering buying a large format 3D printing system to print molds...

The Sailwinds Manufacturing Company is considering buying a large format 3D printing system to print molds for sailboat hulls. The new system has a purchase price of $6,500,000, an estimated useful life and MACRS class life of 7 years, and an estimated salvage value of $500,000. The system will enable the company to save on labor costs and quality control costs. A total annual savings of $450,000 will be realized each year and will increase by 5% for each year of the system’s life if the 3D printing system is purchased. The company is in the 27% marginal tax bracket. The initial investment will be entirely financed with a conventional loan. The interest rate on the loan is 12% with the loan to be repaid in equal annual installments over the project life.

a. Determine the after‐tax cash flows.

b. Evaluate this investment project by using a MARR of 20%, i.e. NPV, IRR

Expert Solution

a.

.	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
Cash Flow	$ 450,000.00	$ 472,500.00	$ 496,125.00	$ 520,931.25	$ 546,977.81	$ 574,326.70	$ 603,043.04
Tax	$ 121,500.00	$ 127,575.00	$ 133,953.75	$ 140,651.44	$ 147,684.01	$ 155,068.21	$ 162,821.62
After Tax Cash Flow	$ 328,500.00	$ 344,925.00	$ 362,171.25	$ 380,279.81	$ 399,293.80	$ 419,258.49	$ 440,221.42

b.

.	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
Initial Investment	$ (6,500,000.00)
Cash Flow		$ 450,000.00	$ 472,500.00	$ 496,125.00	$ 520,931.25	$ 546,977.81	$ 574,326.70	$ 603,043.04
Interest Payment
Tax (27%)		$ 121,500.00	$ 127,575.00	$ 133,953.75	$ 140,651.44	$ 147,684.01	$ 155,068.21	$ 162,821.62
After Tax Cash Flow		$ 328,500.00	$ 344,925.00	$ 362,171.25	$ 380,279.81	$ 399,293.80	$ 419,258.49	$ 440,221.42
Salvage Value								$ 500,000.00
PV of Cash flow	$ (6,500,000.00)	$ 273,640.50	$ 527,045.40	$ 762,732.65	$ 870,460.49	$ 1,194,287.77	$ 1,394,453.75	$ 3,389,498.21

NPV	$ 1,912,118.77
IRR	5%

Interest on the loan is not considered in the calculation, I assume it is reduced in the Annual savings. If it is also added, the Net present value will give a huge amount of negative balance as Annual savings are less than interest.

ekkarill92 answered 2 years ago

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