(4) (8 pts) ABC Inc. purchased a robotic welding system for S485,000. The equipm
ID: 2428817 • Letter: #
Question
(4) (8 pts) ABC Inc. purchased a robotic welding system for S485,000. The equipment has o&M; cost of $22,000 per year. The robotic welding system will result in an annual saving of S197,000. ABC Inc. will sell the drilling equipment to a smaller company for 100,000 after 5 years of service Assume that straight-line depreciation is used (assume the system's life time for depreciation is5 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
Depreciation (straight-line method) = (Cost of purchase – salvage value) / Life years
= $(485,000 – 100,000) / 5
= 77,000
NCF of year 0 = Cost of purchase = - 485,000
NCF of year 1 to year 4 = (Savings – O&M cost – Depreciation) × (1 – tax rate) + Depreciation
= (197,000 – 22,000 – 77,000) × (1 – 0.37) + 77,000
= 98,000 × 0.63 + 77,000
= 61,740 + 77,000
= 138,740
NCF of year 5 = (Savings – O&M cost – Depreciation) × (1 – tax rate) + Depreciation + Salvage value
= 138,740 + 100,000
= 238,740
After-tax NPW = Present value of NCF – Initial investment
= [138,740 {(1/1.08^1) + (1/1.08^2) + (1/1.08^3) + (1/1.08^4)} + 238,740 (1/1.08^5)] – 485,000
= [138,740 (0.92592 + 0.85733 + 0.79383 + 0.73502) + 238,740 × 0.68058] – 485,000
= [138,740 × 3.3121 + 162,481.67] – 485,000
= (459,520.75 + 162,481.67) – 485,000
= 622,002.42 – 485,000
= 137,002.42 (Answer)
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