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%.

Answer 1

We shall follow the the Net Annual Cashflow method to find the annual cash outflow, after accounting for depreciation and taxes, as below:

Particulars	Years 1-5 ($)
Annual Income	-
Less: Operating and Maintenance costs for the year	(41,250.00)
Loss before depreciation and taxes	(41,250.00)
Add: Depreciation Costs	(8,100.00)
Loss before Taxes	(49,350.00)
Less: Tax Savings on Loss @ 45%	(22,207.50)
Loss after Taxes	(27,142.50)
Add back: Depreciation	8,100.00
Net Annual Cash Outflow	(19,042.50)
Annuity Factor for MARR 18%	3.1272
NPV of Annual Costs	(59,549.15)

Notes:

1. Annual operating costs will be computed as below:

Particulars	Amount
Operating and Maintenance costs per unit	$            0.22
Production per day	750 units
No of days in the year	250 units
No of units produced in the year	187500 units
Operating and Maintenance costs for the year	$ 41,250.00

2. Depreciation per year will be computed as below:

Particulars	Amount ($)
Cost of the machine	45,000
Salvage value	-4,500
Depreciable value	40,500
Depreciation per year @ 20%	8,100