Question

In: Economics

Man-U-Facturing Inc. will buy a machine that has a cost of $850,000 and is expected to...

Man-U-Facturing Inc. will buy a machine that has a cost of $850,000 and is expected to be useful for 10 years. At the end of the 10th year, the firm intends to sell the machine for an estimated price of $52,036. In addition, the yearly benefits are expected to be $201,952 while the annual maintenance costs are predicted to be $51,300. The company uses a 9% interest rate for this project and it is currently being taxed at a flat tax rate of 21%. This time assume that Man-U-Facturing Inc. uses straight-line depreciation. What the is the after-tax benefit-cost ratio?

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Expert Solution

Pls see table below. After tax B/C ratio is 1.051 approx

SL depreciation = (850000 - 52036) / 10 201952 - 51300 T21% of taxable income Net cash flow / (1.09^time)
Time Initial investment / Salvage Depreciation Cash flow from asset Taxable income Income tax Net cash flow PV (Net cash flow)
A B C D=C+B E F=A+C+E G
0        -8,50,000     -8,50,000                          -8,50,000
1                          -79,796                        1,50,652           70,856          -14,880      1,35,772                           1,24,562
2                          -79,796                        1,50,652           70,856          -14,880      1,35,772                           1,14,277
3                          -79,796                        1,50,652           70,856          -14,880      1,35,772                           1,04,841
4                          -79,796                        1,50,652           70,856          -14,880      1,35,772                               96,185
5                          -79,796                        1,50,652           70,856          -14,880      1,35,772                               88,243
6                          -79,796                        1,50,652           70,856          -14,880      1,35,772                               80,957
7                          -79,796                        1,50,652           70,856          -14,880      1,35,772                               74,272
8                          -79,796                        1,50,652           70,856          -14,880      1,35,772                               68,140
9                          -79,796                        1,50,652           70,856          -14,880      1,35,772                               62,513
10             52,036                          -79,796                        1,50,652           70,856          -14,880      1,87,808                               79,332
Total benefit                           8,93,321
Total cost                           8,50,000
B/C Ratio 1.050965729

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