Question

In: Economics

An industrial organization has bought a specialized machine for $240,000 which will save $36,000 each year...

An industrial organization has bought a specialized machine for $240,000 which will save $36,000 each year for 10 years. Straight Line (SL) basis depreciation should be taken into consideration with a depreciable life of 10 years. After tax MARR is 10% per year. Effective income tax rate is 40%. After 10 years, the machine will have zero salvage value. a) Draw a table showing Before Tax Cash Flow (BTCF) and After Tax Cash Flow (ATCF). b) Calculate the after tax PW and IRR. (Use interpolation method to find IRR). Is it feasible?

Solutions

Expert Solution

Year gross income initial investment & salvage value before tax cash flow depreciation taxable income taxes after tax cash flow
0 -240000 -240000 0 -240000
1 36000 36000 24000 12000 4800 31200
2 36000 36000 24000 12000 4800 31200
3 36000 36000 24000 12000 4800 31200
4 36000 36000 24000 12000 4800 31200
5 36000 36000 24000 12000 4800 31200
6 36000 36000 24000 12000 4800 31200
7 36000 36000 24000 12000 4800 31200
8 36000 36000 24000 12000 4800 31200
9 36000 36000 24000 12000 4800 31200
10 36000 0 36000 24000 12000 4800 31200

Since company uses straight line depreciation method

after tax IRR is 5.091%

Since after tax present worth at MARR of 10% is less than 0 and after tax IRR is less than MARR. investment in the above machine is not recommended


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