Question

In: Economics

AMT, Inc., is considering the purchase of a digital camera for maintenance of design specifications by...

AMT, Inc., is considering the purchase of a digital camera for maintenance of design specifications by feeding digital pictures directly into an engineering workstation where computer-aided design files can be superimposed over the digital pictures. Differences between the two images can be noted, and corrections, as appropriate, can then be made by design engineers.

a. You have been asked by management to determine the PW of the EVA of this equipment, assuming the following estimates: capital investment = $346,000; market value at end of year six = $115,000; annual revenues = $127,000; annual expenses = $7,000; equipment life = 6 years; effective income tax rate = 22%; and after-tax MARR = 9% per year. MACRS depreciation will be used with a five-year recovery period.

b. Compute the PW of the equipment's ATCFs.

Solutions

Expert Solution

SOLUTION:-

(a)

(i) MACRS method igoners salvage value. MACRS depreciation schedule

Year Equipment cost ($) Depreciation Rate Annual Depreciation ($0
1 3,46,000 20 69,200
2 3,46,000 32 1,10,720
3 3,46,000 19.2 66,432
4 3,46,000 11.52 39,859
5 3,46,000 11.52 39,859
6 3,46,000 5.76 19,930

(ii)

Anuual income, Years 1-5 = Revenue - Cost = 127,000 - 7,000 = 120,000

Annual income, Year 6 = 120,000 + 115,000 Market value = 235,000

(iii)

Taxable income (Ti) = Annual income - Depreciation (D)

(iv)

After - tax income (NI) = TI x (1 - Tax rate0 = TI x (1 - 0.22) = TL x 0.78

(v)

After - tax cash flow (ATCF) = NI + D

(vi)

PV factor in year N = (1.09)-N.

(b)

Therefore,

PW of ATCF computed as follows.

Year Income ($) D ($) TI ($) NI ($) ATCF ($) PV Factor@9% Discounted ATCF ($)
0 -3,46,000 1,0000 -3,46,000
1 1,20,000 69,200 50,800 39,624 1,08,824 0.9174 99,839
2 1,20,000 1,10,720 9,280 7,238 1,17,958 0.8417 99,283
3 1,20,000 66,432 53,568 41,783 1,08,215 0.7722 83,562
4 1,20,000 39,859 80,141 62,510 1,02,369 0.7084 72,521
5 1,20,000 39,859 80,141 62,510 1,02,369 0.6499 66,533
6 2,35,000 19,930 2,15,070 1,67,755 1,87,685 0.5963 1,11,910
PW of ATCF ($) =

1,87,647

THANK YOU

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