please write out processes! Show work for number 8! 8. UTSA Printing Services is

Question

please write out processes! Show work for number 8!

8. UTSA Printing Services is considering the purchase of new type-setting equipment for $6,000 and selling their old one for $2,000. The new equipment wi years and save $1500 a year in expenses. The opportunity cost ofcapital is 16% and the company's tax rate is 40%. ipment will last for 6 oa. Using a straight-line depreciation schedule with zero salvage value at the end of a 6 year life, what are the cash flows of the project each year? (The old equipment is fully depreciated). What is the project's NPV? what would it be if using the 5-Year MACRS schedule? (P#286 in your text). b. c,

Explanation / Answer

a) First we find out the depreciation rate per year with not salvage value = Purchase price $6000 / No. of years 6 = $1000 per year.

Cash flow per year = [(Saving - Depreciation) * (1 - Tax rate)] + Depreciation = [(1500 - 1000) * (1 - 0.4)] + 1000 = $1300 per year

b) The projects' NPV = Cash flow * PVIFA(16% 6) - (Purchase price - Selling price of old equipment) =

= $1300 * 3.685 - ($6000 - $2000) = 4790.50 - 4000 = 790.50

c)

Yr. Depre. rate MACRS 5 Yr. Depreciation sAVING After tax cash flow Discount rate 16% Present value 0 (6000 - 2000) (4000) 1 20 1200 1500 1380 0.862 1189.6 2 32 1920 1500 (420) 0.743 (312) 3 19.20 1152 1500 1361 0.641 872 4 11.52 691 1500 1176 0.552 649 5 11.52 691 1500 1177 0.476 560 6 5.76 346 1500 1039 0.410 426 NPV= (615.40)

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