Question

Please help me with this problem with NO EXCEL. Thank you very much and I will rate.

In 2018, a certain manufacturing company has some existing semi-automated production equipment which they are considering replacing. This equipment has a present market value of $62,000 and a book value of $34,000. It has five more years of straight-line depreciation available (if kept) of $6,800 per year, at which time its BV would be zero. The estimated market value of the equipment five years from now in year 0 dollars) is $17,300. The market value escalation rate on this type of equipment has been averaging 3.7% per year. The total annual operating and maintenance (O&M) expense and other related expenses are averaging $27,000 per year. New automated replacement equipment would be leased. Estimated O&M and related company expenses for the new equipment are $12,300 per year. The annual leasing costs would be $24,300. The MARR (after-tax including inflation component) is 6%, the effective tax rate is 25%, and the study period is five years. Based on an after-tax, A$ analysis, should the new equipment be leased? Use the IRR method.

Answer 1

Note-: Excel is used only as notepad, no excel formula used in the solutions Calculation 1 Calculation of Net salvage Value after tax (if sold today) Market Value Book Value 62000 34000 Gain Tax on Gain 28000 7000 Salvage Value after Tax 55000 Calculation of Net salvage Value after tax (if sold after 5 Years) Market Value after 5 years (Year 0) Market value esclation 3.7% 17300 1.037*1.037*1.037*1.037*1.037 1.199 20746.26 0 Market value Book Value Gain Tax on Gain 20746.26 5186.57 Salvage Value after Tax 15559.70 Calculation of IRR 0 1 2 3 4 5 0 0 -24300 -12300 -24300 -12300 -24300 -12300 0 27800 27800 27800 Leasing Cost of New Machine Operating Cost of New Machine Operating Cost of Old Machine Dep of old machine foregone Total pretax cost Total Post tax cost (1-25%) Dep of old machine 0 -24300 -12300 27800 6800 -2000 -1500 -6800 -24300 -12300 27800 6800 -2000 - 1500 -6800 6800 -2000 - 1500 -6800 0 6800 -2000 - 1500 -6800 6800 -2000 - 1500 -6800 0 0 Increamental operating cash flow 0 -8300 -8300 -8300 -8300 -8300 55000 Salvage value if sold today Salvage value if sold after 5 years -15559.7 Increamental cash flow 55000 -8300 -8300 -8300 -8300 -23859.7 Pvf Value if rate is 2% 1 0.980392 0.961169 0.942322 0.923845 0.905731 NPV 55000 -8137.25 -7977.7 -7821.28 -7667.92 -21610.5 1785.389 PV (6%) PvF value if rate is 1% 1 0.990099 0.980296 0.97059 0.96098 0.951466 PV (9%) 55000 -8217.82 -8136.46 -8055.9 -7976.14 -22701.7 -87.9975 Calculation of IRR 1% + (2-1) (-87.9975-1785.389) X 87.9975 1.05 The actual IRR on incrreamental cashflow is 1.05%, Since MARR is 6% New Equipment should be rejected