Question

A company is considering purchasing equipment to perform quality inspections of one of its finished products. The equipment will cost $150,000 and it is estimated that its specialized function will have no resale value at the end of its useful life. It is estimated that the operating and maintenance costs of the equipment will be $1,000 in the first year and management expects these costs to increase in subsequent years in line with the inflation rate. The company estimates that the life of the equipment will be 10 years. The team qualifies for depreciation purposes as a 5-year MACRS property. Presumably that the general inflation during that period will be 3%, the tax rate of 35% and that the rate of return adjusted for inflation of 15% (Market Rate).
Determine:
1) The present PW and EAW value of the costs associated with this purchase in a tax analysis.
2) The present PW and EAW value of the costs associated with this purchase in a post-tax analysis.
You must use Excel to solve this problem and display all your computations. Include comments and annotations.

Answer 1

		Present Worth(PW) of Cash flow
		(Cash Flow)/((1+i)^N)
		i=Discount Rate =15%=0.15
		N= Year of cash flow
	X	Cost of Equipment	$150,000
			N	A	B=150000*A	C=B*35%	D=C/(1.15^N)
			Year	5 yearMACRS Depreciation Rate	Annual Depreciation	Depreciation tax shield	Present Worth of Tax Shield
			1	20.00%	$30,000	$10,500	$9,130
			2	32.00%	$48,000	$16,800	$12,703
			3	19.20%	$28,800	$10,080	$6,628
			4	11.52%	$17,280	$6,048	$3,458
			5	11.52%	$17,280	$6,048	$3,007
			6	5.76%	$8,640	$3,024	$1,307
						SUM	$36,234
	Y	Present Worth of Depreciation Tax Shield	$36,234
		Maintenance Cost in Year 1	$1,500
		Maintenance Cost in Year 2	$1,545	(1500*1.03)
		Maintenance Cost in Year (N+1)=1.03*Maintenance cost in Year (N)
			N	A	B=A/(1.15^N)
			Year	Maintenance cost	Present Worth of Cost
			1	$1,500	$1,304
			2	$1,545	$1,168
			3	$1,591	$1,046
			4	$1,639	$937
			5	$1,688	$839
			6	$1,739	$752
			7	$1,791	$673
			8	$1,845	$603
			9	$1,900	$540
			10	$1,957	$484
				SUM	$8,348
	Z	Present Worth of Maintenance Cost	$8,348
		PW=Present Worth of Total Cost=X+Z-Y
		PW=150000+8348-36234=	$122,114
	Rate	Discount Rate	15%
	Nper	Number of years	10
	PV	Present Worth of Costs	$122,114
	PMT	EAW=Equivalent Annual Worth	$24,331
		(Using PMT function of excel)
		Pre Tax analysis:
		PW=Present Worth of Cost =X+Z	$158,348	jeff jeffy Next > < Previous Related Solutions A company is considering purchasing equipment to conduct quality inspections of one of its finished products.... A company is considering purchasing equipment to conduct quality inspections of one of its finished products. The equipment will cost $ 150,000 and it is estimated that due to its specialized function it will have no resale value at the end of its useful life. The equipment's operation and maintenance costs are estimated to be $ 1,000 in the first year, and management expects these costs to increase in subsequent years according to the inflation rate. The company estimates that... A company is considering purchasing equipment to conduct quality inspections of one of its finished products.... A company is considering purchasing equipment to conduct quality inspections of one of its finished products. 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