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A company is considering the purchase of a large stamping machine that will cost $135,000, plus...

A company is considering the purchase of a large stamping machine that will cost $135,000, plus $6,700 transportation and $12,300 installation charges. It is estimated that, at the end of five years, the market value of the machine will be $52,000. The IRS has established that this machine will fall under a three-year MACRS class life category. The justifications for the machine include $36,000 savings per year in labor and $46,000 savings per year in reduced materials. The before-tax MARR is 20% per year, and the effective income tax rate is 40%. What is the after-tax equivalent annual worth of this investment over the five year period which ends with the sale of the machine?    (Do not enter a dollar sign $ with your answer.)

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Expert Solution

Time line 0 1 2 3 4 5
Cost of new machine -154000
=Initial Investment outlay -154000
3 years MACR rate 33.33% 44.45% 14.81% 7.41% 0.00%
Savings 82000 82000 82000 82000 82000
-Depreciation =Cost of machine*MACR% -51328.2 -68453 -22807.4 -11411.4 0
=Pretax cash flows 30671.8 13547 59192.6 70588.6 82000
-taxes =(Pretax cash flows)*(1-tax) 18403.08 8128.2 35515.56 42353.16 49200
+Depreciation 51328.2 68453 22807.4 11411.4 0
=after tax operating cash flow 69731.28 76581.2 58322.96 53764.56 49200
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 31200
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 31200
Total Cash flow for the period -154000 69731.28 76581.2 58322.96 53764.56 80400
Discount factor= (1+discount rate)^corresponding period 1 1.2 1.44 1.728 2.0736 2.48832
Discounted CF= Cashflow/discount factor -154000 58109.4 53181.389 33751.713 25928.125 32310.957
NPV= Sum of discounted CF= 49281.58364
Year or period 0 1 2 3 4 5
EAC 16478.76132 16478.761 16478.761 16478.761 16478.761
Discount factor= (1+discount rate)^corresponding period 1.2 1.44 1.728 2.0736 2.48832
Discounted CF= Cashflow/discount factor 13732.3011 11443.584 9536.3202 7946.9335 6622.4446
NPV= 49281.58364
EAC is equivalent yearly CF with same NPV = 16479

jeff jeffy answered 5 months ago
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