1) The Pukie-Duke Company asked you to determine some of the after-tax cash flow
ID: 2494164 • Letter: 1
Question
1) The Pukie-Duke Company asked you to determine some of the after-tax cash flows for equipment used for research and development that is being considered. PDC expects the experiment to operate for five years and to require the purchase of $300,000 worth of capital equipment. The capital equipment will have a resale value of $100,000 at the end of the five years. Pukie-Duke has found a company that will make them a $200,000 loan for the equipment at 10% and 4 years and they want to finance the equipment if possible. Pukie-Duke plans to use MACRS depreciation schedule (three year life) for income tax calculations. The income tax rate is 35%, capital gains are taxed at 21%, and Pukie-Duke uses an after tax MARR of 12%. It turns out that due to them being in the green energy program they can get a 10% tax credit for new investment in equipment. But it will require the purchase of an additional two acres of land for $60,000 and the building of an explosion proof room that will cost $220,000 to be constructed but can be sold back to the original landowner for the ending book value of the land and building at the end of the five years. Assume that the building and land are purchased in January of the first year and sold in December of the 5th year. PDC wants to be a good citizen and evaluate this total alternative of equipment, building and land. The new equipment results in an increase in Pukie-Duke's before-tax annual net income of $145,000, find if it is worth investing on this equipment. 2. If Pukie-Duke could not find outside funds for the capital investment and had to put the total $300,000 for the equipment up front under the same conditions as in problem 1 would it be a wise decision and how did you determine that i.e. did it make the MARR? 3. If Pukie-Duke could lease the machine under the same conditions as Problem 1 except the lease payments would be $65,000 for the equipment, would this make the MARR?
PREFERABLY IN EXCEL PLS!!! :)
Explanation / Answer
Net present value of project = Present value of cash Inflow - Present value of cash outflow
= [ 456058 + 60000* 0.567 + 220000*.567 ] - [ 197200 + 60000 + 220000 ]
= 137618
ANSWER = yes if it is worth investing on this equipment
Present value of cash outflow
Particulars
Equipment
PVF
PV (amount)
Initial investment
100000
1
100000
Repayment of loan (y=4)
200000
.636
127200
Less- 10% tax credit
30000
1
30000
Present value of cash outflow
197200
Present value of cash Inflow
Particulars
Year 1
Year 2
Year 3
Year 4
Year 5
Incremental net income
$145,000
$145,000
$145,000
$145,000
$145,000
Less- depreciation
99000
90450
16582.5
-
-
Annual savings of operating cost
$ 46000
54550
128417.5
145000
145000
Less- tax @35% (b)
$ 16100
19093
44946
50750
50750
Cash flow after tax (a-b)
$ 128900
125907
100054
94250
94250
Add- scrapped value (net of tax)
-
97733
Net annual cash flow
$128900
125907
100054
94250
192983
Present value factor
0.893
0.797
0.712
0.636
0.567
PV of cash inflow
115108
100348
71238
59943
109421
Total PV of cash inflow = 456058
sale of equipment 100000
WDV 93967.5
Net gain 6032.5
Tax @21% 1267
scrap value (net of tax) 98733
2. If Pukie-Duke could not find outside funds for the capital investment and had to put the total $300,000 for the equipment up front under the same conditions as in problem 1
Net present value of project = Present value of cash Inflow - Present value of cash outflow
= [ 456058 + 60000* 0.567 + 220000*.567 ] - [ 27000 + 60000 + 220000 ]
= 648188
ANSWER = yes if it is worth investing on this equipment
Present value of cash outflow
Particulars
Equipment
PVF
PV (amount)
Initial investment
300000
1
300000
Less- 10% tax credit
30000
1
30000
Present value of cash outflow
270000
Particulars
Equipment
PVF
PV (amount)
Initial investment
100000
1
100000
Repayment of loan (y=4)
200000
.636
127200
Less- 10% tax credit
30000
1
30000
Present value of cash outflow
197200
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