Question

Problem 3 Machine Useful Life 20 yrs II 25 yrs Initial Cost Salvage Value Annual Operating Cost $80,000 $20,000 $18.000 $100,000 $25,000 $15,000 first 10 years 20,000 thereafter A company is considering buying a new piece of machinery. A 10 percent interest rate will be used in the computations. Two models of the machine are available. a. Determine which machine should be purchased, based on the equivalent uniform annual cost. b. What is the capitalized cost of machine I? c. Machine I will produce an annual saving of material of $28,000. What is the rate of return if machine I is installed? d. What will be the book value of the machines I after 2 years, based on straight-line depreciation? Problem 4 A medium-sized profitable corporation is considering the purchase of a $3000 used pickup truck for use by the shipping and receiving department. During the truck's 5-year useful life, it is estimated that the firm will save $800 per year after all the costs of owning and operating the truck have been paid. Truck salvage value is estimated at $750. Assume a 34 percent tax rate. a. Make the before-tax and after-tax cash flow table. b. What is the before-tax rate of return? c. Assuming a straight-line deprecation, what is the after-tax rate of return?

Please don’t use Excel and answer all the parts of the questions. Make sure to show your work!!

Answer 1

Problem -4 3000 Purchase Price Useful life Salvage Annual Inflo |Тах 750 800 34% Initial Purchase Tax Rate Year Annual Salvage aivas Cash Flow Inflow Value Before Tax (D=A+B+C) (B) Depreciation (E) Cash flow after dep F =D-E Cah flow after Cah flow Tax after Tax +Dep (H = F* (100-G)) (H+F) (A) -3000 Depreciation 450 (3000-750)/5 350 350 800 800 800 800 800 -3000 800 800 800 800 1550 450 450 450 450 450 350 350 1100 34% 34% 34% 34% 34% 231.00 231.00 231.00 231.00 726.00 581.00 581.00 581.00 581.00 1826.00 750 Year AWNA Assume Rate Assuming Rate of Initial Purchase Annual Salvage Cash Flow @15.7 (This we Return NPV Inflow Value Before Tax got by trial and (1/ Rate) error) -3000 -3000 -3000 800 800 1.1570 0.864304235| 691.4433881 800 800 1.3386 0.747021811 597.6174486 800 800 1.5488 0.645654115 516.5232918 800 800 1.79200 0.558041586 446.4332686 800 750 2.0733 0.482317706 747.5924442 -0.390158576 1550 Final Answer - 15.7% (Please note this percentage is calculated using Trial and Error Method). Rate of Return(i.e Internal Rate of retun) is been calacuted by making NPV zero)

Problem -4 3000 Purchase Price Useful life Salvage Annual Inflo Tax 750 800 0.34 Initial Purchase Annual Inflow Salvage Value Tax Rate Cah flow after Tax Year Cash Flow Before Tax (D=A+B+C) Depreciation (E) Depreciation Cash flow after dep F = D-E cash flow after dep Cah flow after Tax +Dep (H+F) (A) (B) (C) (G) (H = F*(100-G)) |-3000 H 0.34 0.34 800 800 800 800 800 =D12+E12+F12 =D13+E13+F13 =D14+E14+F14 =D15+15+F15 =D16+E16+F16 =D17+E17+F17 =(3000-750/5 =(3000-750)/5 =(3000-750)/5 =(3000-750)/5 1=(3000-750)/5 =G13-H13 =G14-H14 G15-H15 =G16-H16 =G17-H17 0.34 =113*66% =114*66% =115*66% =116*66% =117*66% =K13+113 =K14+114 K15+15 =K16+116 =K17+117 0.34 750 Year Initial Purchase Annual Inflow Salvage Value Cash Flow Before Tax | Assume Rate @15.7 (This we got by trial and error) Assuming Rate of Return (1/ Rate) NPV 1-3000 11 800 800 800 800 800 =D20+20+F20 =D21+E21+F21 =D22+E22+F22 =D23+E23+F23 =D24+24+F24 =D25+E25+F25 1.157 =H211.157 =H22*1.157 =H23*1.157 |-H24*1.157 =1/H20 =1/H21 =1/H22 =1/H23 H24 =1/H25 =G20*120 =G21*121 =G22*122 =G23*123 =G24*124 =G25*125 =SUM(J20:25) Final Answer - 15.7% (Please

Initial Purchase Tax Rate Year Annual Salvage Cash Flow Inflow Value Before Tax (D=A+B+C) (C) Depreciation (E) Cash flow after dep F=D-E Cah flow after Cah flow Tax after Tax Assume Rate @9.75 (This +Dep we got by trial and error) (H = F*(100-G)) (H+F) Assuming Rate of Return NPV (A) (B) (G) -3000 350 WNL 800 800 800 350 -3000 800 800 800 800 1550 450 450 450 450 450 34% 34% 34% 34% 34% 350 -3000 581.00 581.00 581.00 581.00 1826.00 231.00 231.00 231.00 231.00 726.00 1.0975 1.2045 1.3219 1.4508 1.5923 -3000 0.911161731 529.3849658 0.8302157 482.3553219 0.756460775| 439.5037102 0.689258109 400.4589615 0.628025612 1146.774768 -1.52227298 800 350 1100 800 750 Final Answer - 9.75%

Initial Purchase Annual Inflow Salvage Value Tax Rate Cah flow after Tax Year Cash Flow Before Tax (D=A+B+C) Depreciation (E) Cash flow after dep F = D-E NPY (A) (B) (C) (G) (H = F (100-G)) *** -3000 GAUNFO Cah flow after Tax +Dep (H+F) 1-3000 =K35+135 =K36+136 =K37+137 =K38+138 =K39+139 =D34+E34+F34 =D35+E 35+F35 =D36+E36+F36 =D37+E37+F37 =D38+E38+F38 =D39+E39+F39 Assume Rate @9.75 Assuming Rate of (This we got Return by trial and еггог) = TM34 10975 = TM35 =M35 10975 = TM36 =M36 1.0975 = TM137 =M37*1.0975 = TM38 =M38 1.0975 = 1M39 1800 800 1800 800 800 = (3000-7503/5 =(3000-750)/5 = (3000-750/5 =(3000-750)/5 1=(3000-750)/5 =G35-H35 =G36-H36 =G37-H37 =G38-H38 =G39-H39 0.34 0.34 0.34 0.34 0.34 =135*66% =136 66% 1=13766% -138 66% =139766% =L34 N34 =L35*N35 =L36*N36 =L37 N37 =L38*N38 =L39 N39 = SUM(O34:039) 750 Final Answer - 9.75%