An automotive manufacturing engineer must choose between tow machines for replac
ID: 2615349 • Letter: A
Question
An automotive manufacturing engineer must choose between tow machines for replacement on the production floor. First cost, $ Estimated salvage, $ BTCF, $/year Useful life, years Machine A 25,000 4,000 5,000 8 Machine B 16,000 3,500 3,500 8 The machines have the 8-year estimated useful life and BTCF indicated; however, MACRS depreciation over a 5-year recovery period will be applied. An effective tax rate of 40% applies, and the after-tax MARR of 10% applies. Compare the two machines, using present worth after-tax analysis. Use the depreciation rates provided in Table 1Explanation / Answer
Machine A
cost of machine
MACRS dep rate
annual Depreciation
25000
20%
5000
25000
32%
8000
25000
19.20%
4800
25000
11.52%
2880
25000
11.52%
2880
25000
5.7600%
1440
after tax sale proceeds
4000-(4000*40%)
2400
Year
0
1
2
3
4
5
6
7
8
cost of machine
-25000
BTCF
5000
5000
5000
5000
5000
5000
5000
5000
less depreciation
5000
8000
4800
2880
2880
1440
0
0
BTCF after depreciation
0
-3000
200
2120
2120
3560
5000
5000
less tax-40%
0
-1200
80
848
848
1424
2000
2000
ATCF
0
-1800
120
1272
1272
2136
3000
3000
Add depreciation
5000
8000
4800
2880
2880
1440
0
0
operating cash flow
5000
6200
4920
4152
4152
3576
3000
3000
cash flow from scrap
0
2400
net operating cash flow
-25000
5000
6200
4920
4152
4152
5016
3000
5400
present value of cash flow at 10% = cash flow/(1+r)^n
-25000
4545.455
5123.967
3696.469
2835.872
2578.065
2831.401
1539.474
2519.14
NPV = sum of present value of cash flow
669.84
Machine B
cost of machine
MACRS dep rate
annual Depreciation
16000
20%
3200
16000
32%
5120
16000
19.20%
3072
16000
11.52%
1843.2
16000
11.52%
1843.2
16000
5.7600%
921.6
after tax sale proceeds
3500-(3500*40%)
2100
Year
0
1
2
3
4
5
6
7
8
cost of machine
-16000
BTCF
3500
3500
3500
3500
3500
3500
3500
3500
less depreciation
3200
5120
3072
1843.2
1843.2
921.6
0
0
BTCF after depreciation
300
-1620
428
1656.8
1656.8
2578.4
3500
3500
less tax-40%
120
-648
171.2
662.72
662.72
1031.36
1400
1400
ATCF
180
-972
256.8
994.08
994.08
1547.04
2100
2100
Add depreciation
3200
5120
3072
1843.2
1843.2
921.6
0
0
operating cash flow
3380
4148
3328.8
2837.28
2837.28
2468.64
2100
2100
cash flow from scrap
2100
net operating cash flow
-16000
3380
4148
3328.8
2837.28
2837.28
3390.24
2100
2100
present value of cash flow at 10% = cash flow/(1+r)^n
-16000
3072.727
3428.099
2500.977
1937.9
1761.728
1913.702
1077.632
979.6655
NPV = sum of present value of cash flow
672.43
Machine b is better as its present value is more than machine A
Machine A
cost of machine
MACRS dep rate
annual Depreciation
25000
20%
5000
25000
32%
8000
25000
19.20%
4800
25000
11.52%
2880
25000
11.52%
2880
25000
5.7600%
1440
after tax sale proceeds
4000-(4000*40%)
2400
Year
0
1
2
3
4
5
6
7
8
cost of machine
-25000
BTCF
5000
5000
5000
5000
5000
5000
5000
5000
less depreciation
5000
8000
4800
2880
2880
1440
0
0
BTCF after depreciation
0
-3000
200
2120
2120
3560
5000
5000
less tax-40%
0
-1200
80
848
848
1424
2000
2000
ATCF
0
-1800
120
1272
1272
2136
3000
3000
Add depreciation
5000
8000
4800
2880
2880
1440
0
0
operating cash flow
5000
6200
4920
4152
4152
3576
3000
3000
cash flow from scrap
0
2400
net operating cash flow
-25000
5000
6200
4920
4152
4152
5016
3000
5400
present value of cash flow at 10% = cash flow/(1+r)^n
-25000
4545.455
5123.967
3696.469
2835.872
2578.065
2831.401
1539.474
2519.14
NPV = sum of present value of cash flow
669.84
Machine B
cost of machine
MACRS dep rate
annual Depreciation
16000
20%
3200
16000
32%
5120
16000
19.20%
3072
16000
11.52%
1843.2
16000
11.52%
1843.2
16000
5.7600%
921.6
after tax sale proceeds
3500-(3500*40%)
2100
Year
0
1
2
3
4
5
6
7
8
cost of machine
-16000
BTCF
3500
3500
3500
3500
3500
3500
3500
3500
less depreciation
3200
5120
3072
1843.2
1843.2
921.6
0
0
BTCF after depreciation
300
-1620
428
1656.8
1656.8
2578.4
3500
3500
less tax-40%
120
-648
171.2
662.72
662.72
1031.36
1400
1400
ATCF
180
-972
256.8
994.08
994.08
1547.04
2100
2100
Add depreciation
3200
5120
3072
1843.2
1843.2
921.6
0
0
operating cash flow
3380
4148
3328.8
2837.28
2837.28
2468.64
2100
2100
cash flow from scrap
2100
net operating cash flow
-16000
3380
4148
3328.8
2837.28
2837.28
3390.24
2100
2100
present value of cash flow at 10% = cash flow/(1+r)^n
-16000
3072.727
3428.099
2500.977
1937.9
1761.728
1913.702
1077.632
979.6655
NPV = sum of present value of cash flow
672.43
Machine b is better as its present value is more than machine A
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