Question

Scientific Frontiers Corporation manufactures scientific equipment for use in elementary schools. In December of 20x0 the company’s management is considering the acquisition of robotic equipment, which would radically change its manufacturing process. The controller has collected the following data pertinent to the decision.

1. The robotic equipment would cost $1,250,000, to be paid in December of 20x0. The equipment’s useful life is projected to be eight years. The equipment is in the MACRS 5-year property class. The company will use the MACRS accelerated depreciation schedule.

2. The robotic equipment requires software, which will be developed over a two-year period in 20x1 and 20x2. Each software expenditure, which will amount to $24,000 per year, will be expensed during the year incurred.

3. A computer systems operator will be hired immediately to oversee the operation of the new robotic equipment. The computer expert’s annual salary will be $70,000. Fringe benefits will cost $25,000 annually.

4. Maintenance technicians will be needed. The total cost of their wages and fringe benefits will be $150,000 per year.

5. The changeover of the manufacturing line will cost $95,000, to be expensed in 20x1.

6. Several employees will need retraining to operate the new robotic equipment. The training costs are projected as follows:

20x1	$	34,000
20x2		24,000
20x3		15,000

7. An inventory of spare parts for the robotic equipment will be purchased immediately at a cost of $65,000. This investment in working capital will be maintained throughout the eight-year life of the equipment. At the end of 20x8, the parts will be sold for $65,000.

8. The robotic equipment’s salvage value at the end of 20x8 is projected to be $62,500. It will be fully depreciated at that time.

9. Aside from the costs specifically mentioned above, management expects the robotic equipment to save $530,000 per year in manufacturing costs.

10. Switching to the robotic equipment will enable Scientific Frontiers Corporation to sell some of its manufacturing machinery over the next two years. The following sales schedule is projected.

	Acquisition Cost of Equipment Sold					Accumulated Depreciation at Time of Sale					Sales Proceeds
20x1		$	175,000				$	110,000				$	30,000
20x2			330,000					225,000					160,000

11. Scientific Frontiers Corporation’s tax rate is 30 percent.

12. The company’s after-tax hurdle rate is 10 percent.

Use Exhibit 16-9 for your reference.

Required:

Prepare a year-by-year columnar schedule including all of the after-tax cash flows associated with the robotic-equipment decision. Assume that each cash flow will occur at year-end. (Negative amounts should be indicated by a minus sign.)

Type of cash flow	20x0	20x1	20x2	20x3	20x4	20x5	20x6	20x7	20x8
1. acquisition cost and depreciation tax shield
2. software development
3. computer experts salary and fringe benefits
4. maintenance technicians wages and fringe benefits
5. changeover of line
6. employee training
7. investment in working capital (spare parts)
8. salvage value of equipment
tax effect of gain on sale
9. savings on manufacturing costs
10. disposal of equipment:	N/A	N/A	N/A	N/A	N/A	N/A	N/A	N/A	N/A
sales proceeds
tax effect of gain or loss
total after-tax cash flow

Answer 1

Prepare a year-by-year columnar schedule including all of the after-tax cash flows associated with the robotic-equipment decision. Assume that each cash flow will occur at year-end. (Negative amounts should be indicated by a minus sign.)
	Type of Cash Flow	20x0	20x1	20x2	20x3	20x4	20x5	20x6	20x7	20x8
1	Acquisition cost and depreciation tax shield	($1,250,000)	75000	120000	72000	43200	43200	21600
2	Software development		-24000	-24000
3	Computer expert’s salary and fringe benefits	-95000	-95000	-95000	-95000	-95000	-95000	-95000	-95000
4	Maintenance technicians’ wages and fringe benefits	-150000	-150000	-150000	-150000	-150000	-150000	-150000	-150000
5	Changeover of line		-95000
6	Employee training		-34000	-24000	-15000
7	Investment in working capital (spare parts)	-65000	-65000	-65000	-65000	-65000	-65000	-65000	-65000	-65000
8	Salvage value of equipment									62500
	Tax effect of gain on sale									-18750
9	Savings on manufacturing costs		530000	530000	530000	530000	530000	530000	530000	530000
10	Disposal of equipment:
	Sales proceeds		30000	160000
	Tax effect of gain or loss		10,500	-16,500
	Total after-tax cash flow	($1,315,000)	$182,500	$435,500	$277,000	$263,200	$263,200	$241,600	$220,000	$263,750