Question

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.)

Answer 1

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