Question

What is the total after-tax annual cost of a machine with a first cost of $45 000 and operating and maintenance costs of $0.22 per unit produced? It will be sold for $4500 at the end of five years. Production is 750 units per day, 250 days per year. The CCA rate is 20 percent, the after-tax MARR is 18 percent, and the corporate income tax rate is 45%.

Please fully answer

Answer 1

Solution:

We will follow the Net Annual Cash flow strategy to locate the Annual cash outflow, subsequent to representing depreciation and expenses, as below :

Description	Amount	Amount
Net income		------------
Less:
Operating expenses	= $0.22 per unit *750 u per day * 250 days =$ 41,250	($41,250)
Loss before depreciation and tax		($41,250)
Add:
Depreciation	= ($ 45,000 - $ 4,500 ) * 20% = $ 40,500 * 20/100 = $ 8,100	($ 8,100)
Loss before tax	= ($41,250) +($ 8,100) = ( $ 49,350)	( $49,350)
Less:
Corporate tax @ 45%	= ( $49,350) *45% = ( $49,350) *45/100 = ($ 22,207.5)	($22,207.5)
Loss after taxes	= ( $49,350) - ($22,207.5) = ( $ 27,142.5)	($27,142.5)
Add back:
Depreciation	= ($ 45,000 - $ 4,500 ) * 20% = $ 40,500 * 20/100 = $ 8,100	$ 8,100
Net annual cash outflow	= ($27,142.5) - $ 8,100 =$ 19,042.5	($19,042.5)
Annuity factor for MARR @18%	3.1272( from annuity table)	3.1272
Npv of Annual costs	=($19,042.5) * 3.1272 = ($ 59,549.70)	($59,549.70)