Question

In: Accounting

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 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!

Solutions

Expert Solution

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

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...
A company is considering purchasing equipment to perform quality inspections of one of its finished products....
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...
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
ADVERTISEMENT
ADVERTISEMENT