A robotic assembly work center has been proposed to replace the manual assembly
ID: 2654512 • Letter: A
Question
A robotic assembly work center has been proposed to replace the manual assembly of 250,000 pieces annually. It would cost $1,000,000 to purchase, ship and install the new work center. The adoption of this new work center would not have any effect on revenue. Assume that the new assembly center will be worth $250,000 at the end of year 5 The robotic assembly work center is expected to reduce the COGS per unit from $2.34 each to $1.24 each. No changes of working capital or other expenses is expected. The proposal policy on such acquisitions for the company are: 5-year MACRS, a MARR of 15%, income tax rates of 15%, capital gains tax rate of 20%, and a time span of 5 years. Would the acquisition be financially justified? Show excel formula's/calculations. 1 2 3 4 5 MACRS 5 year 20.00% 32.00% 19.20% 11.52% 11.52% A robotic assembly work center has been proposed to replace the manual assembly of 250,000 pieces annually. It would cost $1,000,000 to purchase, ship and install the new work center. The adoption of this new work center would not have any effect on revenue. Assume that the new assembly center will be worth $250,000 at the end of year 5 The robotic assembly work center is expected to reduce the COGS per unit from $2.34 each to $1.24 each. No changes of working capital or other expenses is expected. The proposal policy on such acquisitions for the company are: 5-year MACRS, a MARR of 15%, income tax rates of 15%, capital gains tax rate of 20%, and a time span of 5 years. Would the acquisition be financially justified? Show excel formula's/calculations. 1 2 3 4 5 MACRS 5 year 20.00% 32.00% 19.20% 11.52% 11.52%Explanation / Answer
Initial Investement = -1000000
Salvage Value = 250000
Book Value at the end of 5th year = 1000000*(1-20%-32%-19.20%-11.52%-11.52%)
Book Value at the end of 5th year = 57600
Post Tax salavge Value = Salvage Value - capital gains tax rate *(Salvage Value - Book value)
Post Tax salavge Value = 250000- 20%*(250000-57600)
Post Tax salavge Value = 211520
Saving in Cash flow in year 1 = (Saving in COGS per Unit)*No of Unit Sold *(1-income tax rate) + Deprciation * tax rate
Saving in Cash flow in year 1 = (2.34-1.24)*250000 *(1-15%) + 1000000*20%*15%
Saving in Cash flow in year 1 = 263750
Saving in Cash flow in year 2 = (Saving in COGS per Unit)*No of Unit Sold *(1-income tax rate) + Deprciation * tax rate
Saving in Cash flow in year 2 = (2.34-1.24)*250000 *(1-15%) + 1000000*32%*15%
Saving in Cash flow in year 2 = 281750
Saving in Cash flow in year 3 = (Saving in COGS per Unit)*No of Unit Sold *(1-income tax rate) + Deprciation * tax rate
Saving in Cash flow in year 3 = (2.34-1.24)*250000 *(1-15%) + 1000000*19.2%*15%
Saving in Cash flow in year 3 = 262550
Saving in Cash flow in year 4 = (Saving in COGS per Unit)*No of Unit Sold *(1-income tax rate) + Deprciation * tax rate
Saving in Cash flow in year 4 = (2.34-1.24)*250000 *(1-15%) + 1000000*11.52%*15%
Saving in Cash flow in year 4 = 251030
Saving in Cash flow in year 5 = (Saving in COGS per Unit)*No of Unit Sold *(1-income tax rate) + Deprciation * tax rate
Saving in Cash flow in year 5= (2.34-1.24)*250000 *(1-15%) + 1000000*11.52%*15%
Saving in Cash flow in year 5 = 251030
NPV = -1000000 + 263750/1.15 + 281750/1.15^2 + 262550/1.15^3 + 251030/1.15^4 + 251030/1.15^5 + 211520/1.15^5
NPV = - 11,481.49
Decision : The acquisition would not be financially justified since NPV is negative
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