Wilson Machine Tools is considering a high-tech computer-controlled milling mach
ID: 2598456 • Letter: W
Question
Wilson Machine Tools is considering a high-tech computer-controlled milling machine at a cost of $71,000. The cost of installing the machine, preparing the site, wiring, and rearranging other equipment is expected to be $11,000. This installation cost will be added to the cost of the machine to determine the total cost basis ($82,000) for depreciation. The milling machine is expected to last 6 years. The machine is classified as a seven-year MACRS property. The milling machine will have a $28,000 salvage value at the end of 6 years. Special jigs and tool dies for the milling machine also will be required at a cost of $15,000, and the jigs and dies last only 3 years. Therefore, another set of jigs and dies has to be purchased at the end of year 3, so you should also include the purchase of jigs and dies as another investment in year 3. There is no salvage or disposal cost for the jigs and dies. The jigs and dies are classified as a three-year MACRS property, and you need to depreciate them twice (the first time through years 1 through 3 and the second time in years 4 through 6). Since the jigs and dies have no salvage value but will not be fully depreciated at the end of year 3 and year 6, Wilson will receive a tax refund for the jigs and dies. It will be easier to have separate rows for depreciating the milling machine and depreciating the jigs and dies. With the new milling machine, Wilson expects an additional annual revenue of $82,000 due to increased production. The additional annual production costs are estimated as follows: materials, $8,300; labor $16,000; energy $4,900; and miscellaneous O&M costs $2,400. Wilson s marginal income-tax rate is expected to remain at 36% over the project life of 6 years. All dollar figures given above represent today's (constant) dollars. The expected general inflation rate during the project period is estimated at 3.2%, which applies to the revenue, the expenses (materials, labor, energy, O&M), the salvage value, and the cost of purchasing the jigs and dies at the end of 3 years. If Wilson's inflation-free interest rate (MARR') is 12.3%, calculate the net present worth of the cash flow for the computer-controlled milling machine project after accounting for inflation.
Explanation / Answer
Year 0 1 2 3 4 5 6 NPW Machine Cost -82,000 31,953 Jigs Cost -15,000 -14,600 400 BTCF 97,000 97,000 97,000 97,000 97,000 97,000 Depn on Machine 11,718 20,082 14,342 10,242 7,323 7,314 Depn on Jigs 5,000 6,668 2,222 5,000 6,668 2,222 PBT 80,283 70,251 80,437 81,759 83,010 87,464 Tax 28,902 25,290 28,957 29,433 29,884 31,487 PAT 51,381 44,960 51,479 52,326 53,126 55,977 Depn 16,717 26,749 16,563 15,241 13,990 9,536 ATCF 68,098 71,710 68,043 67,567 67,116 65,513 FCF -97,000 68,098 71,710 53,443 67,567 67,116 97,866 Inflation factor 1 0.9689922 0.938946 0.90983137 0.8816195 0.8542825 0.8277931 Real FCF -97,000 65,987 67,332 48,624 59,568 57,336 81,013 Disc Factor 1 0.890472 0.7929403 0.70609109 0.6287543 0.5598881 0.4985646 Real Disc. FCF -97,000 58,759 53,390 34,333 37,454 32,102 40,390 1,59,428 Since NPW>0, so project can be started Calculation of Depn Year Rate Depn Cost Tax Refund Rate Depn Cost Tax Refund 0 82000 15000 1 14.29% 11717.8 33.33% 4999.5 2 24.49% 20081.8 44.45% 6667.5 3 17.49% 14341.8 14.81% 2221.5 15000 400.14 4 12.49% 10241.8 33.33% 4999.5 5 8.93% 7322.6 44.45% 6667.5 6 8.92% 7314.4 3,953 14.81% 2221.5 400.14 Salvage inflow after tax Salvage 28,000 Tax Refund 3,953 Total 31,953
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.