Question

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 the useful life of the equipment will be 10 years. The team qualifies for depreciation purposes as a 5-year MACRS property. Assume that headline inflation during that period will be 3%, the tax rate 35%, and the inflation-adjusted rate of return 15% (Market Rate).
Determine:
1) The present value PW and EAW of the costs associated with this purchase in a pre-tax analysis.
2) The PW present value and the EAW of the costs associated with this purchase in an after-tax analysis.
You must use Excel to solve this problem and display all your computations. Include comments and annotations.
You must use Excel to solve these problems and display all your computations. Include comments and annotations when you deem it necessary (for example, to make a presumption).

Please USE ONLY EXCEL AND IT'S FUNCTIONAL FUNCTIONS PLEASE. IT'S VERY IMPORTANT TO MY CLASS. Thanks a lot!

Answer 1

M& M Company
PW & EAW Calculation
1. Pre Tax analysis
Not cosnidering depreciation as it is pretax analysis , depreciation will not affect cash flow
			a	b
Year	Investment	O&M Cost with 3% inflation	Cash Cost	Discount factor @15%=1/1.15^n	PW of cost=a*b=
0	150000		150,000.00	1.000	150,000.00
1		1,000.0	1,000.00	0.870	870.00
2		1,030.0	1,030.00	0.756	778.68
3		1,060.9	1,060.90	0.658	698.07
4		1,092.7	1,092.73	0.572	625.04
5		1,125.5	1,125.51	0.497	559.38
6		1,159.3	1,159.27	0.432	500.81
7		1,194.1	1,194.05	0.376	448.96
8		1,229.9	1,229.87	0.327	402.17
9		1,266.8	1,266.77	0.284	359.76
10		1,304.8	1,304.77	0.247	322.28
Total				6.019	155,565.15
So Total PW=	$         155,565
Annuity factor for 10 years @15%=		6.019
EAW =PW/6.019=		$      25,845.68

2. After Tax analysis	a	b	c	c	d.
Year	Investment	O&M Cost with 3% inflation	5 Year MACRS Depreciation %	Depreciation Amt	Depreciation Tax shield=c*35%	Cash Cost=a+b-d	Discount factor @15%=1/1.15^n	PW of cost=a*b=
0	150000		20.00%	30000	10500	139,500.00	1.000	139,500.00
1		1,000.0	32.00%	48000	16800	(15,800.00)	0.870	(13,746.00)
2		1,030.0	19.20%	28800	10080	(9,050.00)	0.756	(6,841.80)
3		1,060.9	11.52%	17280	6048	(4,987.10)	0.658	(3,281.51)
4		1,092.7	11.52%	17280	6048	(4,955.27)	0.572	(2,834.42)
5		1,125.5	5.76%	8640	3024	(1,898.49)	0.497	(943.55)
6		1,159.3		0	0	1,159.27	0.432	500.81
7		1,194.1		0	0	1,194.05	0.376	448.96
8		1,229.9		0	0	1,229.87	0.327	402.17
9		1,266.8		0	0	1,266.77	0.284	359.76
10		1,304.8		0	0	1,304.77	0.247	322.28
Total							6.019	113,886.70