Aerodrome Corporation spends 5 million dollars for a sophisticated lathe to crea

Question

Aerodrome Corporation spends 5 million dollars for a sophisticated lathe to create aerodynamically efficient missile nose cones. The system will be used for 10 years after which it will have 400,000 dollars of salvage value. The maintenance of the system will start at 20,00 per year and increase at a rate of 30,000 per year until the end of the 10 year period. The economic environment has a tax rate of 40% and an after tax MARR of 12%. Show for the ten years The Before Tax Cash Flow The depreciation allowance Taxable Income Tax After Tax Cash Flow Also show the Present Worth of System.

Explanation / Answer

Year Details of cost Amount Depreciation Tax shield@ 40% Savings in Tax outflow due to maintenance exp(Amount*Tax40%. Total tax savings PV F @ MARR 12% PV @ 12% 0 Initial cost -5000000 -5000000 1 -5000000 1 Maintenance 20000 184000 8000 192000 0.89286 171429.1 2 50000 184000 20000 204000 0.79719 162626.8 3 80000 184000 32000 216000 0.71178 153744.5 4 110000 184000 44000 228000 0.63552 144898.6 5 140000 184000 56000 240000 0.56743 136183.2 6 170000 184000 68000 252000 0.50663 127670.8 7 200000 184000 80000 264000 0.45235 119420.4 8 230000 184000 92000 276000 0.40388 111470.9 9 260000 184000 104000 288000 0.36061 103855.7 10 290000 184000 116000 300000 0.32197 96591 10 Salvage Value 400000 240000 0.32197 77272.8 Beforetax cash flows -3050000 -2300000 NPV of given cash flows = present Worth = -3594836 b Annual depreciation Initial cost 5000000 Salvage Value 400000 Depreciable value 4600000 Depreciation/Yr. 460000 (Allowance)

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