Chapter 09, Problem 023 (GO Tutorial) Incorrect. Milliken uses a digitally contr

Question

Chapter 09, Problem 023 (GO Tutorial) Incorrect. 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 17.68 33,750 17.68 33,750 17.68 C. 33,750 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

Ans Years Years Years Years Years Years Years Years Years 0 1 2 3 4 5 6 7 8 Cost of digitally controlled dyer 300000 Cash inflow 85000 85000 85000 85000 85000 85000 85000 85000 salvage value of asset 30000 Less: - Depreciation 33750 33750 33750 33750 33750 33750 33750 33750 EBIT 51250 51250 51250 51250 51250 51250 51250 81250 tax@ 40% 20500 20500 20500 20500 20500 20500 20500 32500 ( EBIT * 40% ) EAT 30750 30750 30750 30750 30750 30750 30750 48750 Add: - depreciation 33750 33750 33750 33750 33750 33750 33750 33750 CFAT 64500 64500 64500 64500 64500 64500 64500 82500 Present value under straight line depreciation Discount rate 12% Discount factor at 12% 0.89285714 0.797193878 0.711780248 0.63551808 0.56742686 0.50663112 0.452349215 0.4038832 Present value of cash flows 57589.2857 51419.0051 45909.82598 40990.9161 36599.0322 32677.7073 29176.52439 33320.366 Actual value of cash inflow 534000 cash outfolw at present value 300000 Cash inflow at present value 327683 Net present value 27683 IRR 14.54% Interpolating the NPV we ger IRR og 14.54% at which present value of cash inflow = present value of cash outflows Economic rate of return = ( EBIT )* (1 - tax rates) / total asset 10% 10% 10% 10% 10% 10% 10% 16% ARR = Average PAT / Initial investment Avegare PAT 33000 Initial inventment 300000 11% Calculation of depreciation Staright line Depreciation = cost of asset - salvage / life of asset Cost 300000 Salvage 30000 Life 8 Years Depreciation   33750 Calculation under reducing balance method Years Years Years Years Years Years Years Years Years 0 1 2 3 4 5 6 7 8 Cost of digitally controlled dyer 300000 Cash inflow 85000 85000 85000 85000 85000 85000 85000 85000 salvage value of asset 30000 Less: - Depreciation 75000 56250 42188 31641 23730 17798 13348 10011 EBIT 10000 28750 42812.5 53359.375 61269.5313 67202.1484 71651.61133 104988.71 tax@ 40% 4000 11500 17125 21343.75 24507.8125 26880.8594 28660.64453 41995.483 ( EBIT * 40% ) EAT 6000 17250 25687.5 32015.625 36761.7188 40321.2891 42990.9668 62993.225 Add: - depreciation 75000 56250 42188 31641 23730 17798 13348 10011 CFAT 81000 73500 67875 63656.25 60492.1875 58119.1406 56339.35547 73004.517 Present value under straight line depreciation Discount rate 12% Discount factor at 12% 0.89285714 0.797193878 0.711780248 0.63551808 0.56742686 0.50663112 0.452349215 0.4038832 Present value of cash flows 72321.4286 58593.75 48312.08432 40454.6977 34324.8917 29444.9654 25485.06324 29485.3 Actual value of cash inflow 533986.4502 cash outfolw at present value 300000 Cash inflow at present value 338422 Net present value 38422 IRR 15.77% Interpolating the NPV we ger IRR og 15.77% at which present value of cash inflow = present value of cash outflows Economic rate of return = ( EBIT )* (1 - tax rates) / total asset 2% 6% 9% 11% 12% 13% 14% 21% ARR = Average PAT / Initial investment Avegare PAT 33002.54059 Initial inventment 300000 11% Calculation of depreciation Staright line Depreciation = cost of asset - salvage / life of asset Cost 300000 Salvage 30000 Life 8 Years Straight line depreciation rate 12.5% Double declining method 25% ( 12.5% *2 ) Years Beginning book value Depreciaiton rate Depreciation expense ending book value 1 300000 25% 75000 225000 2 225000 25% 56250 168750 3 168750 25% 42188 126563 4 126563 25% 31641 94922 5 94922 25% 23730 71191 6 71191 25% 17798 53394 7 53394 25% 13348 40045 8 40045 25% 10011 30034

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