Question

Raytheon wishes to use an automated environmental chamber in the manufacture of electronic components. The chamber is to be used for rigorous reliability testing and burn-in. It is installed for $1,480,000 and will have a salvage value of $240,000 after 8 years. Its use will create an opportunity to increase sales by $650,000 per year and will have operating expenses of $250,000 per year. All dollar amounts are expressed in real dollars. Depreciation follows MACRS 5-year property, taxes are 25%, the real after-tax MARR is 10%, and inflation is 5.0%.

1. Determine the actual after-tax cash flows for each year.ATCF₀ = $enter a dollar amount
   ATCF₁ = $enter a dollar amount
   ATCF₂ = $enter a dollar amount
   ATCF₃ = $enter a dollar amount
   ATCF₄ = $enter a dollar amount
   ATCF₅ = $enter a dollar amount
   ATCF₆ = $enter a dollar amount
   ATCF₇ = $enter a dollar amount
   ATCF₈ = $enter a dollar amount
2. Determine the PW of the after-tax cash flows.
   PW_$T = $enter a dollar amount
3. Determine the AW of the after-tax cash flows.
   AW_$T = $enter a dollar amount
4. Determine the FW of the after-tax cash flows.
   FW_$T = $enter a dollar amount
5. Determine the combined IRR of the after-tax cash flows.
   IRR_c = enter percentages %
6. Determine the combined ERR of the after-tax cash flows.
   ERR_c = enter percentages %
7. Determine the real IRR of the after-tax cash flows.
   IRR_r = enter percentages %
8. Determine the real ERR of the after-tax cash flows.
   ERR_r = enter percentages %

Answer 1

The table below shows the calculation of ATCF:

Statement of after-tax cash flows:

Year	BTCF (1)	DWO (2)	TI (3) 3 = (1-2)	T (4) 4 = (3*0.25)	ATCF (5) 5 = (1-4)
0	-$ 1,480,000	$ 1,55,000	$ 1,325,000	$ 3,31,250	$ 1,148,750
1	$ 1,480,000	$ 1,55,000	$ 1,325,000	$3,31,250	$ 1,148,750
2	$ 1,480,000	$ 1,55,000	$ 1,325,000	$ 3,31,250	$ 1,148,750
3	$ 1,480,000	$ 1,55,000	$ 1,325,000	$ 3,31,250	$ 1,148,750
4	$ 1,480,000	$ 1,55,000	$ 1,325,000	$ 3,31,250	$ 1.148,750
5	$ 1,480,000	$ 1,55,000	$ 1,325,000	$ 3,31,250	$ 1.148,750
6	$ 1,480,000	$ 1,55,000	$ 1,325,000	$ 3,31,250	$ 1.148,750
7	$ 1,480,000	$ 1,55,000	$ 1,325,000	$ 3,31,250	$ 1.148,750

8

$ 1,480,000

$ 1,55,000

$ 1,325,000

$ 3,31,250

$ 1.148,750

Before-tax cash flows (BTCF) is the excess amount of sales after deducting operating expenses in each year.

The ATCF is the excess amount of taxable income (TI) over tax (T) after adding DWO.

Depreciation written off (DWO) in each year is the cost of equipment after deducting the salvage value and by dividing the number of years. ($1,480,000 - $ 2,40,000) / 8 = $ 1,55,000

Taxable income (TI) is the difference between BTCF and DWO.

Present worth (PW) :

PW = ATCF /

r means the rate of opportunity cost

n is the number of years

PW = -$ 1,480,000+ $ 1,148,750/(1.1) +$ 1,148,750/ + $ 1,148,750/ + $ 1,148,750/ +......+ $ 1,148,750/

= - $ 1,480,000+ $ 1,044,318.18 + $ 94938.016 + $ 863,072.877 + $ 784,665.30 + $ 713,509.31+$ 648,644.83+$ 589,677.12 + $ 536,047.59

= $ 3,794,873.21

Annual worth :

AW = r * PW (/ -1)

= 0.1*$ 3,794,873.21(/ -1)

= $ 709,641.28

IRR = 15.24%

ERR = 12.65%