Purchasing a Milling machine will cost $95,000. Installing the machine cost $15,

Question

Purchasing a Milling machine will cost $95,000. Installing the machine cost $15,000. Installiation and milling machine cost go together. Special tools that need purchasing cost $10,000. The Milling machine has a lifetime of 10 years. The special tools have a lifetime of 5 years. The Milling machine has a salvage value of $10,000. The special tools have a salvage value of $300.

Milling machine is classified as a 7 year MACRS property and the special tools are a 3 year MARCS property.

Milling machine has annual revenue of $80,000 and annual usage cost of $31,500.

Marginal tax income rate is 35% over 10 year lifetime. The firms market interest rate is 18% and expected inflation is 4%.

This is a very involved problem. Please show work and I will definitey give rating! Only answer if familure with problem and know solution approach. Thanks! Below are the questions.

1. Determine the cash flow in actual (non inflated) dollars and the cash flow with inflation.

2. Rate of return before taxes (Both with inflation and without inflation)

3. Rate of return after taxes (Both with inflation and without inflation)

GOOD LUCK!!

Explanation / Answer

Milling machine Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total Value $ 110000 MACRS Depreciation Rate % 14.29 24.49 17.49 12.49 8.93 8.92 8.93 4.46 Depcreciation 15719 26939 19239 13739 9823 9812 9823 4906 Special tools Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Total value $ 10000 MACRS Depreciation Rate % 33.35 44.45 14.81 7.41 Depcreciation 3335 4445 1481 741 Depreciation on milling machine 15719 26939 19239 13739 9823 9812 9823 4906 0 0 Depreciation on special tools 3335 4445 1481 741 Total annual depreciation 19054 31384 20720 14480 9823 9812 9823 4906 0 0 1) Actual cash flow (non inflated) Cash inflow 80000 80000 80000 80000 80000 80000 80000 80000 80000 80000 Less Usage cost 31500 31500 31500 31500 31500 31500 31500 31500 31500 31500 Add: Tax savings /shield due to depreciation @ 35% 6669 10984 7252 5068 3438 3434 3438 1717 0 0 Total annual inflow 55169 59484 55752 53568 51938 51934 51938 50217 48500 48500 Cost of capital without inflation 18% 18% 18% 18% 18% 18% 18% 18% 18% 18% PV Factor @ 18% 0.84746 0.71818 0.60863 0.51579 0.43711 0.37043 0.31393 0.26604 0.22546 0.19106 NPV @ 18% 46753 42721 33932 27630 22703 19238 16305 13360 10935 9267 242842 Cash flow (With inflation) Cost of capital with inflation @4% 18 18.72 19.47 20.25 21.06 21.90 22.78 23.69 24.63 25.62 PV Factor @ 18% + 4% inflation 0.84746 0.84232 0.83703 0.83160 0.82604 0.82034 0.81446 0.80847 0.80238 0.79605 NPV @ 18% + 4% inflation 46753.31 50104.78 46666.11 44547.19335 42902.73 42603.94 42301.72 40599.16 38915.19 38608.5 434003 2)(Before Tax)   Actual cash flow (non inflated) Cash inflow 80000 80000 80000 80000 80000 80000 80000 80000 80000 80000 Less Usage cost 31500 31500 31500 31500 31500 31500 31500 31500 31500 31500 Less:Depreciation(MACRS) 19054 31384 20720 14480 9823 9812 9823 4906 0 0 Net income 29446 17116 27780 34020 38677 38688 38677 43594 48500 48500 PV Factor @ 18% 0.84746 0.71818 0.60863 0.51579 0.43711 0.37043 0.31393 0.26604 0.22546 0.19106 NPV of annual net income@ 18% 24954 12292 16908 17547 16906 14331 12142 11598 10935 9267 146880 Total investment(110000+10000) 120000 NPV of net income 146880 Net returns(146880-120000) 26880 Rate of return % (26880/120000) 0.224 ie. 22.40% (Before Tax) Cash flow (With inflation) Net income 29446 17116 27780 34020 38677 38688 38677 43594 48500 48500 PV Factor @ 18% + 4% inflation 0.84746 0.84232 0.83703 0.83160 0.82604 0.82034 0.81446 0.80847 0.80238 0.79605 NPV @ 18% + 4% inflation 24954.24 14417.12 23252.7 28291.06029 31948.62 31737.49 31501.06 35244.56 38915.19 38608.5 298871 Total investment(110000+10000) 120000 NPV of net income 298871 Net returns(298871-120000) 178871 Rate of return % (178871/120000) 1.490592 ie. 149.06% 3(After Tax)   Actual cash flow (non inflated) Cash inflow 80000 80000 80000 80000 80000 80000 80000 80000 80000 80000 Less Usage cost 31500 31500 31500 31500 31500 31500 31500 31500 31500 31500 Less:Depreciation(MACRS) 19054 31384 20720 14480 9823 9812 9823 4906 0 0 Income before tax 29446 17116 27780 34020 38677 38688 38677 43594 48500 48500 Less Tax @ 35% 10306.1 5990.6 9723 11907 13536.95 13540.8 13536.95 15257.9 16975 16975 Net income after tax 19140 11125 18057 22113 25140 25147 25140 28336 31525 31525 PV Factor @ 18% 0.84746 0.71818 0.60863 0.51579 0.43711 0.37043 0.31393 0.26604 0.22546 0.19106 NPV of annual net income after tax@ 18% 16220 7990 10990 11406 10989 9315 7892 7538 7108 6023 95472 Total investment(110000+10000) 120000 NPV of net income 95472 Net returns(95472-120000) -24528 Rate of return % (24528/120000) -0.2044 ie. -20.44% (After Tax) Cash flow (With inflation) Net income 19140 11125 18057 22113 25140 25147 25140 28336 31525 31525 PV Factor @ 18% + 4% inflation 0.84746 0.84232 0.83703 0.83160 0.82604 0.82034 0.81446 0.80847 0.80238 0.79605 NPV @ 18% + 4% inflation 16220.25 9371.125 15114.25 18389.18919 20766.6 20629.37 20475.69 22908.97 25294.87 25095.53 194266 Total investment(110000+10000) 120000 NPV of net income 194266 Net returns(298871-120000) 74266 Rate of return % (74266/120000) 0.618883 ie. 61.88%

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