A company is considering investment in a Flexible Manufacturing System. The esti

Question

A company is considering investment in a Flexible Manufacturing System. The estimated cash flow for the investment are as follows:

N                                 Description                            Cash flow ($)

0                                  price of the system               Fo

1-4                              revenue per year                  1,000,000

1-4                              Expense per year                 500,000

4                                  Salvage Value                      0

The company pays income tax at 35% and the allowed depreciation schedule as follows

Year                Depreciation %

1                      33.33

2                      44.45

3                      14.81

4                       7.41

Assume that the MARR is 12%. What is the maximum value of the investment value (Fo) which makes this investment attractive, using Present Worth Criterion?

Explanation / Answer

The NPV comes out to be positive at $ 2,113,840. So the maximum value of invetment is $ 2,113,840

Cah inflow cash outflow Total cash flow Dep % Dep amount Tax benefit on Dep Total cash flow PV 0 (2,113,840) (2,113,840) 1          1,000,000           500,000         500,000 33.33%       699,930          244,976       744,976         665,157 2          1,000,000           500,000         500,000 44.45%       933,450          326,708       826,708         659,046 3          1,000,000           500,000         500,000 14.81%       311,010          108,854       608,854         433,370 4          1,000,000           500,000         500,000 7.41%       155,610            54,464       554,464         352,372              9,944

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