Question

The profitable Palmer Golf Cart Corp. is considering investing $300,000 in special tools for some of the plastic golf cart components. The present golf cart model will continue to be manufactured and sold for 5 years, after which a new cart design will be needed, together with a different set of special tools. The saving in manufacturing costs, owing to the special tools, is estimated to be $150,000 per year for 5 years. Assume MACRS depreciation for the special tools and a 22.98% combined income tax rate.

(a) What is the after-tax payback period for this investment?

(b) If the company wants a 12% after-tax rate of return, is this a desirable investment?

Answer 1

ANSWER

Tax rate	22.98%
	Year-1	Year-2	Year-3	Year-4	Year-5
Contribution	150,000	150,000	150,000	150,000	150,000
Less: Depreciation as per table given below	60,000	96,000	57,600	34,560	34,560
Profit before tax	90,000	54,000	92,400	115,440	115,440
Tax	20,682	12,409	21,234	26,528	26,528
Profit After Tax	69,318	41,591	71,166	88,912	88,912
Add Depreciation	60,000	96,000	57,600	34,560	34,560
Cash Profit After tax	129,318	137,591	128,766	123,472	123,472
Cost of macine		300,000
Depreciation for 5 years		282,720
WDV		17,280
Sale price		-
Profit		(17,280)
Tax		(3,971)
Sale price after tax		3,971
Depreciation	Year-1	Year-2	Year-3	Year-4	Year-4	Total
Cost	300,000	300,000	300,000	300,000	300,000
Dep Rate	20.00%	32.00%	19.20%	11.52%	11.52%
Depreciation	60,000	96,000	57,600	34,560	34,560	282,720
Calculation of NPV
Year	Capital		Operating cash	Annual Cash flow	PV factor @ 12%	Present values	Cumulative cash flow
0	(300,000)			(300,000)	1.000	(300,000)	(300,000)
1			129,318	129,318	0.893	115,463	(170,682)
2			137,591	137,591	0.797	109,687	(33,091)
3			128,766	128,766	0.712	91,653	95,675
4			123,472	123,472	0.636	78,469	219,147
5	3,971		123,472	127,443	0.567	72,314	346,590
				Net Present Value		167,586
Payback period	=2+33091/128766
Payback period	2.26	Years

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