Your company is contemplating the purchase of a large stamping machine. The mach

Question

Your company is contemplating the purchase of a large stamping machine. The machine will cost $180,000.

With additional transportation and installation costs of $5,000 and $10,000, respectively, the cost basis for

depreciation purposes is $195,000. Its MV at the end of ve years is estimated as $40,000. The IRS has

assured you that this machine will fall under a three-year MACRS class life category. The justications for

this machine include $40,000 savings per year in labor and $30,000 savings per year in reduced materials. The

before-tax MARR is 20% per year, and the effective income tax rate is 40%. The PW of the after-tax savings from the machine, in labor and materials only,

(neglecting the rst cost, depreciation, and the salvage value) is most nearly:

(Hint: Use the after tax MARR, which must be calculated)

$12,000

$95,000

$151,000

$184,000

$193,000

$12,000

$95,000

$151,000

$184,000

$193,000

Explanation / Answer

After tax MARR = 20(1-.40) = 20*.60 = 12%

Total savings = 40000+ 30000 = 70000

After tax savings = 70000(1- .40 ) = 70000*.60 = 42000

Present worth of savings = PVAF@12%,5 *After tax savings

                               = 3.60478* 42000

                              = $ 151,400.60     [approx to 151000]

correct option is "C" -151000

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