In: Economics
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 = $7,000; equipment life = 6 years; effective income tax rate = 22%; and after-tax MARR = 9% per year. MACRS depreciation will be used with a five-year recovery period.
b. Compute the PW of the equipment's ATCFs.
SOLUTION:-
(a)
(i) MACRS method igoners salvage value. MACRS depreciation schedule
Year | Equipment cost ($) | 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 |
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