Our company must replace an obsolete machine press. We have two bids, summarized

Question

Our company must replace an obsolete machine press. We have two bids, summarized below, to consider. Machine A is depreciated using MACRS. Machine B is depreciated using SOYD. Machine A will be sold for $5000 at the end of its useful life and machine B will be sold for $10,000 at the end of its useful life. Our company uses an after-tax MARR of 12% and it falls in the 38% total income tax bracket. Our company is required to purchase one of these two machines, do nothing is not an option. Machine A Machine B Useful Life (years) Initial Cost Annual O & M Annual Revenue Salvage Value 5 $76,000 $70,000 $85,000 $5,000 $75.000 $62,000$ $82,000 0 Based on the After Tax Cash Flow and using a Net Present Worth analysis and considering taxes which machine should our company purchase? (5 points)

Explanation / Answer

Ans:-
Machine A:
Year Net Annual Rev dep (macrs) ibt iat *(1-0.38) cash flow dis 12% PV
0 -75000 -75000 1 -75000
1 20000 15000 5000 3100 18100 0.893 16163
2 20000 24000 -4000 5520 29520 0.797 23527
3 20000 14250 5750 3565 17815 0.712 12684
4 20000 9000 11000 6820 15820 0.636 10062
5 20000 8250 11750 7285 15535 0.567 8808
Salvage 5000 3100 3100 0.567 1758
NPW= -1997.42
Machine B:
Year Net Annual Rev dep(soyd) ibt iat *(1-0.38) cash flow dis 12% PV
0 -76000 -76000 1 -76000
1 15000 22000 -7000 9660 31660 0.893 28272
2 15000 17600 -2600 3588 21188 0.797 16887
3 15000 13200 1800 1116 14316 0.712 10193
4 15000 8800 6200 3844 12644 0.636 8042
5 15000 4400 10600 6572 10972 0.567 6221
Salvage 10000 6200 6200 0.567 3515
NPW= -2869.68
As both the machine is presenting a negative NPV, so none of the machine is recommended to purchase.

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