Question
In: Economics
A company is evaluating the addition of equipment to its present operations. They need to purchase...
- A company is evaluating the addition of equipment to its present operations. They need to purchase equipment for $160,000. The 5-year MACRS GDS recovery method (see table 7.3) is appropriate for the investment and the total tax rate is 40%. Gross revenue is expected to be $30,000/YEAR while maintenance cost is expected to be $5,000/YEAR. It is expected that operations will shut down by the end of the 4th year with a salvage value of $20,000.
Part A:
Draw a before tax cash flow diagram
Part B:
Use a table to show the development of the after-tax cash flow
Part C:
If the after-tax MARR is 12%, is the investment profitable?
Solutions
Expert Solution
Solution :-
Net Annual Revenue = $30,000 - $5,000 = $25,000
Book Value after 4 Years = $160,000 - [ $32,000 + $51,200 + $30,720 + $18,432 ]
= $27,648
Now Salvage Value = $20,000
Loss on Sale = $27,648 - $20,000 = $7,648
Tax Saving due to loss on Sale = $7,648 * 0.40 = $3,059.20
Net after tax Salvage Value = $20,000 + $3,059.20 = $23,059.20
The investment is not Profitable as the Present Worth is Negative .
(A) Cash flow Diagram
If there is any doubt please
ask in comments
Thank you please rate
Rahul Sunny answered 1 year agoRelated Solutions
Argyl Manufacturing is evaluating the possibility of expanding its operations. This expansion will require the purchase...
Argyl Manufacturing is evaluating the possibility of expanding
its operations. This expansion will require the purchase of land at
a cost of $100,000. A new building will cost $110,000 and will be
depreciated on a straight-line basis over 20 years to a salvage
value of $0. Actual land salvage at the end of 20 years is expected
to be $150,000. Actual building salvage at the end of 20 years is
expected to be $140,000. Equipment for the facility is expected...
The operations manager for an auto supply company is evaluating the potential purchase of a new...
The operations manager for an auto supply company is evaluating
the potential purchase of a new machine for the production of a
transmission component. Current manufacturing
costs are fixed costs of $11,000 and a variable cost of $0.50 per
unit. The new machine would have fixed cost of $4,000
and a variable cost of $0.75 per unit. Each component is sold for
$1.50 per unit.
a. Develop two separate models in your spreadsheet to
calculate Total Profit for each option. (8 pts)
The...
The following data are accumulated by Reynolds Company in evaluating the purchase of $164,000 of equipment,...
The following data are accumulated by Reynolds Company in
evaluating the purchase of $164,000 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$35,000
$60,000
Year 2
22,000
46,000
Year 3
11,000
35,000
Year 4
(1,000)
23,000
Present Value of $1 at Compound
Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683
0.636
0.572
0.482
5...
Thomas Corporation is evaluating whether to lease or purchase equipment. Its tax rate is 21% ....
Thomas Corporation is evaluating whether to lease or purchase
equipment. Its tax rate is 21% . The company expects to use the
equipment for 4 years, with no expected salvage value. The purchase
price is $2 million and MACRS depreciation, 3-year class, will
apply. If the company enters into a 4-year lease, the lease payment
is $460,000 per year, payable at the beginning of each year. If the
company purchases the equipment it will borrow from its bank at an...
Harriman Manufacturing Company is evaluating the purchase of a new piece of equipment. The quoted price...
Harriman Manufacturing Company is evaluating the
purchase of a new piece of equipment. The quoted price is $50,000,
and it would cost Harriman another $ 10,000 for related capital
costs such as transportation and equipment modification for special
use. The total investment would fall into MACRS three year class
with depreciation rates being applied to the full capitalized costs
not excluding salvage at 33%, 45%, 15% and 7% in years 1-4,
respectively. Harriman expects that the equipment would be sold...
Harriman Manufacturing Company is evaluating the purchase of a new piece of equipment. The quoted price...
Harriman Manufacturing Company is evaluating the purchase of a
new piece of equipment. The quoted price is $50,000, and it would
cost Harriman another $ 10,000 for related capital costs such as
transportation and equipment modification for special use. The
total investment would fall into MACRS three year class with
depreciation rates being applied to the full capitalized costs not
excluding salvage at 33%, 45%, 15% and 7% in years 1-4,
respectively. Harriman expects that the equipment would be sold...
Net Present Value Method The following data are accumulated by Paxton Company in evaluating the purchase...
Net Present Value Method
The following data are accumulated by Paxton Company in
evaluating the purchase of $128,700 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$36,000
$61,000
Year 2
22,000
47,000
Year 3
11,000
35,000
Year 4
(1,000)
24,000
Present Value of $1 at Compound
Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683...
Net Present Value Method The following data are accumulated by Paxton Company in evaluating the purchase...
Net Present Value
Method
The following data are
accumulated by Paxton Company in evaluating the purchase of $98,100
of equipment, having a four-year useful life:
Net Income
Net Cash Flow
Year 1
$31,000
$53,000
Year 2
19,000
41,000
Year 3
9,000
31,000
Year 4
(1,000)
21,000
Present Value of $1 at Compound
Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683...
Net Present Value Method The following data are accumulated by Geddes Company in evaluating the purchase...
Net Present Value Method
The following data are accumulated by Geddes Company in
evaluating the purchase of $153,200 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$44,000
$75,000
Year 2
27,000
58,000
Year 3
13,000
44,000
Year 4
(1,000)
29,000
Present Value of $1 at Compound
Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683...
Net Present Value Method The following data are accumulated by Reynolds Company in evaluating the purchase...
Net Present Value Method
The following data are accumulated by Reynolds Company in
evaluating the purchase of $107,700 of equipment, having a
four-year useful life:
Net Income
Net Cash Flow
Year 1
$31,000
$53,000
Year 2
19,000
41,000
Year 3
9,000
31,000
Year 4
(1,000)
21,000
Present Value of $1 at Compound
Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
0.890
0.826
0.797
0.756
0.694
3
0.840
0.751
0.712
0.658
0.579
4
0.792
0.683...
ADVERTISEMENT
ADVERTISEMENT
Latest Questions
- What policy reasons exist for adverse possession to be a way to get title to a...
- try to find articles that deal with virtual servers and/or the cloud to discuss the problems...
- An 70 kg running back has a football and is making a break for a touchdown...
- Find the acceleration of a 2500 kg truck that has a force acted on by its...
- hi please elaborate axial flow pumps working principle with labelled and the flow image , application...
- Assume that your widget manufacturing company has a total annual demand of N widgets per year...
- Drs. Glenn Feltham and David Ambrose began operations of their physical therapy clinic, called Northland Physical...
ADVERTISEMENT