[3 points]. ALCOA is considering purchasing a new smelting furnace for their spe
ID: 1119234 • Letter: #
Question
[3 points]. ALCOA is considering purchasing a new smelting furnace for their specialty materials division. Purchased today, the furnace costs $223,600 and will be used for the next 6 years. At the end of this time, ALCOA believes they will be able to sell the furnace for $10,000 (salvage value) in the second hand equipment market. The new furnace is expected to save $120,400 in energy costs per year but will require an additional $41,280 per year in operating and maintenance costs. The furnace will be depreciated according to a five-year MACRS schedule. ALCOA's tax rate is 40%. Should ALCOA purchase this furnace? To answer this question develop the net cash flows for each year and assume an MARR of 15%. 1.Explanation / Answer
Decision Whether to Purchase Furnace or not :
If Net Present Value is Positive Purchase Furnace, otherwise Donot Purchase.
Tax savings on Depreciation:
Cost of furnace : $223,600
Less: Salvage Value : ($10,000)
Depreciable Amount : $213,600
Period : 6 Years
Depreciation per year : $35600
Tax rate : 40%
Tax savings on Depreciation : $14240.
Calculation of Net Present Value: Amount in $
Year
Information
Cash flow After tax
Tax Savings on Depreciation
Net inflow/(outflow)
PVF/AF@15%
Net Present Value
0
Outflow
-
-
(223,600)
1
(223,600)
1-6
Inflow
120,400-41,280= 79,120 *60%= 47,472
14,240
61,712
3.784
233,518
6
Salvage value
-
-
10000*60%=6000
0.432
2592
Net Present Value
12,510
Since Net Present Value is Positive it is recomended to Purchase Furnace.
Year
Information
Cash flow After tax
Tax Savings on Depreciation
Net inflow/(outflow)
PVF/AF@15%
Net Present Value
0
Outflow
-
-
(223,600)
1
(223,600)
1-6
Inflow
120,400-41,280= 79,120 *60%= 47,472
14,240
61,712
3.784
233,518
6
Salvage value
-
-
10000*60%=6000
0.432
2592
Net Present Value
12,510
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