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. 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... M&M company is considering purchasing equipment to conduct quality inspections of one of its finished products.... M&M 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... ANALYSIS OF COSTS WITH INFLATION A company is considering purchasing equipment to conduct quality inspections of... ANALYSIS OF COSTS WITH INFLATION 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... An Engineering company is considering purchasing a piece of plant equipment and wishes to compare its... An Engineering company is considering purchasing a piece of plant equipment and wishes to compare its replacement strategies for purchase and maintenance over a period of time. The machine’s initial cost is $170,000 with immediate payment required. Running Costs including maintenance are $12,000 in year 1, $17,000 in year 2, $24,000 in year 3 and $33,000 in year 4. Payments are required at the end of each year. Interest rates are 4% p.a. The equipment will have a salvage value... An Engineering company is considering purchasing a piece of plant equipment and wishes to compare its... An Engineering company is considering purchasing a piece of plant equipment and wishes to compare its replacement strategies for purchase and maintenance over a period of time. The machine’s initial cost is $160,000 with immediate payment required. Running Costs including maintenance are $11,000 in year 1, $16,000 in year 2, $23,000 in year 3 and $32,000 in year 4. Payments are required at the end of each year. Interest rates are 4% p.a. The equipment will have a salvage value... A company is considering purchasing new equipment. The purchase of the equipment is       expected to... A company is considering purchasing new equipment. The purchase of the equipment is       expected to generate after tax savings of $12,600 each year for 8 years. The company can       borrow money at 6%. Assume annual compounding.         Determine the present value of the future cash inflows. Hint: the $12,600 are your annuity payments 3. Chavez Company is considering purchasing new equipment or overhauling its existing equipment. The manager has... 3. Chavez Company is considering purchasing new equipment or overhauling its existing equipment. The manager has gathered the following information: Current machinery: Original cost $ 50,000 Accumulated depreciation 40,000 Annual operating costs 5,000 Current market value 1,500 Salvage value at the end of five years - Cost of overhauling machinery: Cost of overhaul $ 12,000 Annual operating costs after overhauling 2,000 Salvage value at the end of five years - New machinery: Cost $ 56,000 Annual operating costs 1,000 Salvage... A company is considering of purchasing a testing equipment costing $50,000. This equipment is expected to... A company is considering of purchasing a testing equipment costing $50,000. This equipment is expected to reduce labor costs by $16,000 annually. The equipment has useful life of 5 years, but falls in the 3-year property class for depreciation purpose. No salvage value is expected at the end. The marginal tax rate is 34% and its required after-tax rate of return is 16%. 1.What is the incremental after-tax cash flow for the first year of operation? 2.On the basis of... A company is considering whether to replace one of its construction equipment. • The existing equipment... A company is considering whether to replace one of its construction equipment. • The existing equipment has a current cost of $15,000, which declines by 20% each year for three years. The operating cost for this equipment is $20,000 for year 1, $8,000 for year 2, and $12,000 for year 3. • The proposed equipment will cost $50,000, last five years, and has a market value that declines by 20% each year. The operating cost for the proposed equipment is... ADVERTISEMENT Subjects Accounting Advanced Math Anatomy and Physiology Biology Chemistry Civil Engineering Computer Science Economics Electrical Engineering Finance History Math Mechanical Engineering Operations Management Physics Psychology Statistics and Probability Nursing Other ADVERTISEMENT Latest Questions Calculate the ideal age of a spouse. Enter either m or f from the keyboard in... Due to a recession, expected inflation this year is only 4.75%. However, the inflation rate in... What are the benefits of doing a pilot program before a full scale rollout of a... It is a calm summer day in southeast Iowa at the Ottumwa air traffic control radar... 1. Write a detailed article on Evolution of attacks on the internet & web [your article... Analyze the role of the contingency plan coordinator (CPC) in the scope of preparing a BIA.... Amazing Manufacturing, Inc., has been considering the purchase of a new manufacturing facility for $500,000. The... ADVERTISEMENT About @ 2020 WizEdu