Chapter 09, Problem 023 (GO Tutorial) Milliken uses a digitally controlled dyer

Question

Chapter 09, Problem 023 (GO Tutorial) Milliken uses a digitally controlled dyer for placing intricate and integrated patterns on manufactured carpet squares for home and commercial use. It is purchased for $300,000. It is expected to last 8 years and has a salvage value of $30,000. Increased before tax cash flow due to this dyer is $85,000 per year. Milliken's tax rate is 40%, and the after-tax MARR is 12%. Develop tables using a spreadsheet to determine the ATCF for each year and the after-tax PW, Aw, IRR, and ERR after 8 years. a. Use straight-line depreciation (no half-year convention) b. Use MACRS-GDS and state the appropriate property class. c. Use double declining balance depreciation (no half-year convention, no switching). PW AW IRR ERR b. C. Round your answer to 2 decimal places for PW and AW. Do not round intermediate computations. Tolerance is +/- 1. Round to 2 decimal places and present in percentage format IRR and ERR. Tolerance is +/- 0.02.

Explanation / Answer

ATCF is $ 64,500

IRRis 17.68%

Amount ($) Amount($) Before tax cash flow            85,000 Before tax cash flow      85,000 Less: Depreciation            33,750 Less: Depreciation      33,750 Net income before tax            51,250 Net income before tax      51,250 Less: Tax @40%            20,500 Less: Tax @40%      20,500 Net income after tax            30,750 Net income after tax      30,750 Add: Depreciation            33,750 Add: Depreciation      33,750 After tax cash flow (ATCF)            64,500 After tax cash flow (ATCF)      64,500 Cumulative discount factor (12%)              6.194 Cumulative discount factor (20%)         4.078 Present value of annual cash a          399,513 Present value of annual cash a    263,031 Salvage            30,000 Salvage      30,000 Discount factor              0.404 Discount factor         0.267 Present value            12,116 Present value         8,010 Present valueof cash inflow          411,629 Present valueof cash inflow    271,041 Less: Initial outlay          300,000 Less: Initial outlay    300,000 NPV          111,629 NPV    (28,959) IRR = 12+8*111629/(111629+45524) = 17.68%

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