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%. Assume Man-U-Facturing Inc. uses SOYD depreciation. What the is the after-tax benefit-cost ratio?

Solutions

Expert Solution

After tax B/C ratio is 1.067 as per table below.

SOYD for Y1 = (850000 - 52036) * 10 /55, for Y2 = (850000 - 52036) * 9/55 and so on 201952 - 51300 21% 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                       -1,45,084                        1,50,652             5,568            -1,169      1,49,483                           1,37,140
2                       -1,30,576                        1,50,652           20,076            -4,216      1,46,436                           1,23,252
3                       -1,16,067                        1,50,652           34,585            -7,263      1,43,389                           1,10,723
4                       -1,01,559                        1,50,652           49,093          -10,310      1,40,342                               99,422
5                          -87,051                        1,50,652           63,601          -13,356      1,37,296                               89,233
6                          -72,542                        1,50,652           78,110          -16,403      1,34,249                               80,048
7                          -58,034                        1,50,652           92,618          -19,450      1,31,202                               71,772
8                          -43,525                        1,50,652        1,07,127          -22,497      1,28,155                               64,317
9                          -29,017                        1,50,652        1,21,635          -25,543      1,25,109                               57,603
10             52,036                          -14,508                        1,50,652        1,36,144          -28,590      1,74,098                               73,541
Total benefit                           9,07,052
Total cost                           8,50,000
B/C Ratio 1.067119662

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