Zeon, a large, profitable corportation is considering adding some automatic equi
ID: 1178503 • Letter: Z
Question
Zeon, a large, profitable corportation is considering adding some automatic equipment to it's production facilities.
An investment of $120,000 will produce an inital annual benefit of $29,000, but the benefits are expected to decline $3000 per year, making second-year benefits $26,000, third-year benefits $23,000, and so forth. If the firm uses Sum-of-years digits depreciation, an 8-year useful life, and $12,000 salvage value, will it obtain the desired 6% after-tax rate of reutrn?
Assume the the equipment can be sold for its $12,000 salvage value at the end of the 8 years. Also assume a 46% income tax rate for state and federal taxes combined.
Please Show how you arrived at your answer!
Explanation / Answer
DEPRICATION = (120000/36) = 3333.33
YEAR 0
CASH FLOW = -120000
YEAR 1
BEFORE TAX CASH FLOW = 29000 - 26666.67 = 2333.33
AFTER TAX CASH FLOW = 2333.33 * (1-0.46) = 1259.9982
YEAR 2
bEFORE TAC CASH FLOW = 26000 - 7* 3333.33 = 2666.69
AFTER TAX CASH FLOW = 2666.69 * (1-0.46) = 1440.0126
YEAR 3
BEFORE TAX FLOW = 23000 - 6*3333.33 = 3000.02
AFTER TAX CASH FLOW = 3000* (1-0.46) = 1620.0108
YEAR4
AFTER TAX CASH FLOW = 3333.35 * (1-0.46) = 1800.009
YEAR 5
AFTER TAX CASH FLOW = 3666.68 * (1-0.46) = 1980.0072
YEAR 6
AFTER TAX CASH FLOW = 4000.01 * (1-0.46) = 2160.0054
YEAR 7
AFTER TAX CASH FLOW = 4333.34 * (1-0.46) = 2340.0036
YEAR 8
AFTER TAX CASH FLOW = 4666.67 * (1-0.46) = 2520.0018
0 = -120000 + 1259.9982/(1+irr) + 1440.0126/(1+irr)^2 + 1620.0108/(1+irr)^3 +.............+ 2520.0018/(1+IRR)^8 + 12000/(1+irr)^8
irr = -19.69%
HENCE IT ODESNOT OBTAIN THE DESIRED AFTER TAX RETURN
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.