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
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Rahul Sunny answered 2 years agoRelated Solutions
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0.943
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0.890
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0.840
0.751
0.712
0.658
0.579
4
0.792
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