Henredon purchases a high-precision programmable router for shaping furniture co

Question

Henredon purchases a high-precision programmable router for shaping furniture components for $250,000. It is expected to last 12 years and have a salvage value of $7,000. It will produce $70,000 in net revenue each year during its life. All dollar amounts are expressed in real dollars. Depreciation follows MACRS 7-year property, taxes are 40%, the real after-tax MARR is 10%, and inflation is 3.9%. Determine the actual after-tax cash flows for each year from 0 to 12. Determine the PW of the after-tax cash flows. $ Determine the AW of the after-tax cash flows. $ Determine the FW of the after-tax cash flows. $ Determine the combined IRR of the after-tax cash flows. % Determine the combined ERR of the after-tax cash flows. % Determine the real IRR of the after-tax cash flows. % Determine the real ERR of the after-tax cash flows. %

Explanation / Answer

a. Tax savings on depreciation:

Loss on sale of asset = 84491-70000 = 14491

Tax savings on above = 14491 x 40% = $5796

Salvage value net of tax = 70000 - 5796 = $64204

After tax cash flows per year:

b. Discount rate = (1+real interest rate)x(1+Inflation rate) - 1

= (1.1)x(1+0.039) - 1

= 14.29%

Present worth of the project = $42782

Year Opening balance Dep rate Depreciation Closing balance Tax savings 1 250000 14.29 35725 214725 14290 2 214725 24.49 52586 162139 21034 3 162139 17.49 28358 133781 11343 4 133781 12.49 16209 117072 6484 5 117072 8.93 10455 106617 4182 6 106617 8.92 9510 97107 3804 7 97107 8.93 8672 88435 3469 8 88435 4.46 3944 84491 1578

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