(4) (8 pts) ABC Inc. purchased a robotic welding system for $485,000. The equipm
ID: 2428753 • Letter: #
Question
(4) (8 pts) ABC Inc. purchased a robotic welding system for $485,000. The equipment has O&M; cost of $22,000 per year. The robotic welding system will result in an annual saving of $197,000. ABC Inc. will sell the drilling equipment to a smaller company for 100,000 after 5 years oif service Assume that straight-line depreciation is used (assume the system's life time for depreciation is 5 years). The company uses an after-tax MARR rate of 8% and they are in the 37% tax bracket. Determine the after-tax net present worth of the asset over the 5-year service period.Explanation / Answer
Working notes:
(i) Annual depreciation ($) = (Cost - Sale value) / Useful life = (485,000 - 100,000) / 5 = 385,000 / 5
= 117,000
(ii) Before-tax cash flow (BTCF), years 1-4 ($) = Annual saving - O&M cost = 197,000 - 22,000
= 175,000
[BTCF, year 5 ($) = 175,000 + 100,000 (Sale value) = 275,000]
(iii) Pre-tax income = BTCF - Depreciation
Pre-tax income, years 1-4 ($) = 175,000 - 117,000 = 58,000
Pre-tax income, year 5 ($) = 275,000 - 117,000 = 158,000
(iv) After-tax income = Pre-tax income x (1 - Tax rate) = Pre-tax income x (1 - 0.37)
= Pre-tax income x 0.63
After-tax income, years 1-4 ($) = 58,000 x 0.63 = 36,540
After-tax income, year 5 ($) = 158,000 x 0.63 = 99,540
(v) After-tax cash flow (ATCF) = After-tax income + Depreciation
ATCF, year 0 = - 485,000
ATCF, years 1-4 ($) = 36,540 + 117,000 = 153,540
ATCF, year 5 ($) = 99,540 + 117,000 = 216,540
Therefore,
Present worth ($) = - 485,000 + 153,540 x P/A(8%, 4) + 216,540 x P/F(8%, 5)
= - 485,000 + 153,540 x 3.3121** + 216,540 x 0.6806**
= - 485,000 + 508,539.83 + 147,377.12
= 170,916.95
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