Question

1. AAA Pest control uses a before-tax MARR of 20% per year and is considering two new spray machines with the following information Machine First Cost BTCF Salvage: Valu Useful Life $15,000-$22,000 53,()()() ss,000 S3,,500 $5,000 10 years10 years a) Which option should be selected on a before tax analysis? b) If the company uses an effective tax rate of 40% and the equipment depreciates using a GDS 7-year recovery, which machine should be selected on an after tax basis?

Please show me all the steps, I need to understand the process.

Answer 1

Part1- Machine Term MARR BTCF (A) Present Value of Annuity 1$ (B) Present Value of BTCF (PVIF) (A*B 20% 20% 3,000 $4.19 12,577 5,000 20,962 Present Value of Outflow (PVOF) Net Present Value (PVIF-PVOF) 15,000 22,000 (1,038) (2,423) Present Value of Annuity for 1$ at 20% for 10 year has been calculated. Now if we see that NPVfor both the machine is negative in ideal scenario none of this machine should be selected. However if we need to select one we should select Machine B as the NPVis higher for Machine B as compared to MachineA Part2 Particulars YO 4 7 Machine A 3,000 1,800 2,143 857 2,657 3,000 1,800 2,624 1,050 2,850 3,000 1,800 1,874 3,000 1,800 1,339 3,000 1,800 1,339 BTCF 3,000 1,800 3,673 1,469 3,269 3,000 1,800 1,339 536 2,336 3,000 1,800 669 268 2,068 3,000 3,000 ATFC (BTCF,6) (A 1,800 1,800 Depreciation Tax Savings on Depreciation @ 40% (в 750 536 536 Revised Tax flow (XA+B 2,550 2,336 2,336 1,800 1,800 Discounting Rate @ 20% ( Discounted Cash inflow (X"Y) PMF 0.83 0,69 0.58 0.48 0.40 0.33 0.28 0.23 0.19 10,856 2,214 2,270 1,649 1,230 939 652 481 349 291

Cash Outflow (PVOF) 15,000 NPV (4,144) Machine B BTCF 5,000 5,000 3,000 5,388 2,155 5,155 5,000 3,000 3,848 1,539 4,539 5,000 3,000 2,749 1,099 4,099 5,000 3,000 1,963 5,000 5,000 3,000 1,963 5,000 5,000 5,000 ATFC ( BTCF*.6) (A) 3,000 3,000 3,000 3,143 1,257 4,257 3,000 3,000 1,963 Depreciation Tax Savings on Depreciation @ 40% (B) 982 785 785 785 393 Revised Tax flow (X A+B) 3, 785 3,785 3, 785 3,393 3,000 3,000 Discounting Rate @ 20% (Y) Discounted Cash inflow (X*Y) PVMF 0.83 0.69 0.58 0.48 0.40 0.33 0.28 0.23 0.19 0.16 17,432 22,000 (4,568) 3,548 3,580 2,627 1,977 1,521 1,268 1,056 789 581 485 Cash Outflow (PVOF) NPV Machine A should be selected as it has higher NPV To Calculate after tax cash inflow have reduced BTCF by 40% which is the tax rate For Depreciation saving understanding perspective-say Net income is 100 without depreciation and tax rate is 40% hence tax outflow is 40. Now if Depreciation Charge is 20 hence revised net Income is 80 and tax on this is 32. Hence there is a savings on tax outflow on depreciation component of 8. Which will be added to cash inflow For depreciation have used 7Year GDS with 200% DB method. 1. 2. 3. Hope this working will make things clear, let me know in case you need more details.