Question

A company is considering the purchase of a capital asset for

​$110,000.

Installation charges needed to make the asset serviceable will total

​$25,000.

The asset will be depreciated over six years using the​ straight-line method and an estimated salvage value

​(SV6​)

of

​$24,000.

The asset will be kept in service for six​ years, after which it will be sold for

​$34,000.

During its useful​ life, it is estimated that the asset will produce annual revenues of

​$25,000.

Operating and maintenance​ (O&M) costs are estimated to be

​$6,000

in the first year. These​ O&M costs are projected to increase by

​$1,000

per year each year thereafter. The after tax MARR is

15​%

and the effective tax rate is

25​%.

a. Compute the​ after-tax cash flows.

b. Compute the​ after-tax present worth of the​ project, and use a uniform gradient in your

formulation.

c. The​ before-tax present worth of this asset is

−​$67,009.

By how much would the annual revenues have to increase to make the purchase of this asset justifiable on a ​before-tax​ basis?

11 of 11 (9 complete) HWS -) - a capital asset for $110,000. Installation charges needed to make the asset serviceable will total $25,000. The asset will be depreciated over six years using the straigh will LE -25,000.C ty * More Info chel et ar Discrete Compounding: 15% Single Payment Uniform Series Uniform Gradient in Gradient Compound Compound Sinking Capital Gradient Uniform Amount Present Amount Present Fund Recovery Present Series Factor Worth Factor Factor Worth Factor Factor Factor Worth Factor Factor To Find F To Find P To Find F To Find P To Find A To Find A To Find P To Find A Given P Given F Given A Given A Given F Given P Given G Given G N F/P P/F F/A PIA AF A/P A/G 1.1500 0.8696 1.0000 0.8696 1.0000 1.1500 0.0000 0.0000 2 1.3225 0.7561 2.1500 1.6257 0.4651 0.6151 0.7561 0.4651 3 1.5209 0.6575 3.4725 2.2832 0.2880 0.4380 2.0712 0.9071 4 1.7490 0.5718 4.9934 2.8550 0.2003 0.3503 3.7864 1.3263 5 2.0114 0.4972 6.7424 3.3522 0.1483 0.2983 5.7751 1.7228 2.3131 6 0.4323 8.7537 3.7845 0.1142 0.2642 7.9368 2.0972 7 2.6600 0.3759 11.0668 4.1604 0.0904 0.2404 10.1924 2.4498 3.0590 0.3269 13.7268 8 4.4873 0.0729 0.2229 12.4807 2.7813 9 3.5179 0.2843 16.7858 4.7716 0.0596 3.0922 0.2096 14.7548 10 4.0456 0.2472 3.3832 5.0188 20.3037 0.0493 0.1993 16.9795 P/G 1 Print Done Clear All

Answer 1

Depreciation Calculation
Purchase cost of asset	110,000
Add Installation charge	25,000
Total Asset value	135,000
Less Salvage value estimated	24,000
Depreciable Value	111,000
Asset life in years	6
Annual Depreciation =	18,500
Actual Salvage value after 6 yrs	34,000
Capital Gain from asset sale after 6 yrs	10,000
Tax on Capital Gain @25%	2,500

	Present Worth/NPV Calculation	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
	Initial Investment
	Capital Asset cost	(135,000)
a	Total initial Investment
	Cash flow from operations		25,000	25,000	25,000	25,000	25,000	25,000
	Annual Revenue
	O&M expenses		6,000	7,000	8,000	9,000	10,000	11,000
	Depreciation expense		18,500	18,500	18,500	18,500	18,500	18,500
	EBT		500	(500)	(1,500)	(2,500)	(3,500)	(4,500)
	Tax @25%		125	(125)	(375)	(625)	(875)	(1,125)
	Post Tax income		375	(375)	(1,125)	(1,875)	(2,625)	(3,375)
	Add back Depreciation		18,500	18,500	18,500	18,500	18,500	18,500
b	Cash flow from Operations		18,875	18,125	17,375	16,625	15,875	15,125
	Terminal Value
	Salvage value less Tax on Capital gain							31,500
c	Total Terminal Cash flow							31,500
d	Total After Tax cash flows =a+b+c=	(135,000)	18,875	18,125	17,375	16,625	15,875	46,625

e	PV factor @ 15% =1/1.15^n	1	0.8696	0.7561	0.6575	0.5718	0.4972	0.4323
f	PV of Cash flows	(135,000)	16,414	13,704	11,424	9,506	7,893	20,156
g	Present worth =NPV =Sum of PV of cash flows=	(55,903)	Ans b.

Ans c.

If before tax present worth is -$67009, then the before tax PV of incremental sales revenue need to be $67,010 to have positive NPV/PW and

the purchase can be justified. The PVIF value for 6 years @15% is 3.7845

Assume that annual sales increase required =x

So x*3.7845=67010

x=17,706.43

So the annual sales to be increased by $17,716.43 so that the asset purchase can be justified.