1.Calculation of incremental after tax cash flows: | |
Purchase | |
Purchase of New Equipment | $ 300,000.00 |
Add:One time Transfer expense net of tax ($30,000 * 60 %) | $ 18,000.00 |
Less:Sale of old equipment net of tax on gain ($10,000 *60%) | $ 6,000.00 |
Total initial cash outflow | $ 312,000.00 |
Time 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | |
MACRS Percentage | 14.29% | 24.49% | 17.49% | 12.49% | 8.93% | 8.92% | 8.93% | 4.46% | |
Depreciation Rate | 14.29% | 24.49% | 17.49% | 12.49% | 8.93% | 8.92% | 8.93% | 4.46% | |
Depreciation Tax Shield | $ 17,148.00 | $ 73,470.00 | $ 52,470.00 | $ 37,470.00 | $ 26,790.00 | $ 26,760.00 | $ 26,790.00 | $ 13,380.00 |
2. Net Present Value: | ||||||||||
Time 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | Total NPV | |
a.Cash Operating Savings | $ 90,000.00 | $ 150,000.00 | $ 150,000.00 | $ 150,000.00 | $ 150,000.00 | $ 150,000.00 | $ 150,000.00 | $ 150,000.00 | ||
b.Less: tax effect (a*40%) | $ 36,000.00 | $ 60,000.00 | $ 60,000.00 | $ 60,000.00 | $ 60,000.00 | $ 60,000.00 | $ 60,000.00 | $ 60,000.00 | ||
c. Cash Saving After Tax (a-b) | $ 54,000.00 | $ 90,000.00 | $ 90,000.00 | $ 90,000.00 | $ 90,000.00 | $ 90,000.00 | $ 90,000.00 | $ 90,000.00 | ||
d. Deprecation Tax Shield | $ 17,148.00 | $ 73,470.00 | $ 52,470.00 | $ 37,470.00 | $ 26,790.00 | $ 26,760.00 | $ 26,790.00 | $ 13,380.00 | ||
e. After Tax Cash Flows (c+d) | $ 71,148.00 | $ 163,470.00 | $ 142,470.00 | $ 127,470.00 | $ 116,790.00 | $ 116,760.00 | $ 116,790.00 | $ 103,380.00 | ||
f.Discount Factor (1/1.12)^ n | 1.00 | 0.892857143 | 0.797193878 | 0.711780248 | 0.635518078 | 0.567426856 | 0.506631121 | 0.452349215 | 0.403883228 | |
g.Present Value (e*f) | $ 63,525.00 | $ 130,317.28 | $ 101,407.33 | $ 81,009.49 | $ 66,269.78 | $ 59,154.25 | $ 52,829.86 | $ 41,753.45 | $ 596,266.45 |
Net Cash Flow = $ 284,266.45
Philadelphia Fastener Corporation manufactures nails, screws, bolts, and other fasteners. Management is considering a proposal to...
Philadelphia Fastener Corporation manufactures nails, screws,
bolts, and other fasteners. Management is considering a proposal to
acquire new material-handling equipment. The new equipment has the
same capacity as the current equipment but will provide operating
efficiencies in labor and power usage. The savings in operating
costs are estimated at $150,000 annually.
The new equipment will cost $300,000 and will be purchased at the
beginning of the year when the project is started. The equipment
dealer is certain that the equipment...
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