Some new production machinery has a first cost of $100,000 and a useful life of

Question

Some new production machinery has a first cost of $100,000 and a useful life of 10 years. Its estimated O&M costs are $10,000 the first year, which will increase annually by $4,000. The asset’s before tax market value will be $50,000 at the end of the first year and then will decrease by $5,000 annually. This property is a 7-year MACRS property. The company uses a 6% after-tax MARR and is subject to a combined federal/state tax rate of 40% Determine:

a) The after-tax cash flows.

b) The property’s economic service life after tax

Show your calculations.

Note: Can you please show me the step by step solution and if used an excel sheet, please provide it or email it to malzubi93@gmail.com

Thank you!

Explanation / Answer

a) After tax cash flows 0 1 2 3 4 5 6 7 8 9 10 initial cost 100000 o & m expenses 10000 14000 18000 22000 26000 30000 34000 38000 42000 46000 tax shield on the o&m cost -4000 -5600 -7200 -8800 -10400 -12000 -13600 -15200 -16800 -18400 tax shield on depreciation -5714 -9796 -6997 -4998 -3570 -3570 -3570 -1784 0 0 After tax cash outflows 100000 286 -1396 3803 8202 12030 14430 16830 21016 25200 27600 b) The property's economic service life after tax PVIF @ 6% 1.0000 0.9434 0.8900 0.8396 0.7921 0.7473 0.7050 0.6651 0.6274 0.5919 0.5584 PV of cash outflows 100000 269 -1242 3193 6497 8990 10173 11193 13185 14916 15412 Total PV of cash outflows if asset is   sold at the end of the year 100269 99027 102220 108717 117706 127879 139072 152257 167173 182585 PV of cash inflow after tax adjustment if sold at the year end 60647 45826 34838 26531 20119 14349 9167 5647 3551 1675 Present value of net cash out flows 39623 53201 67382 82186 97587 113530 129904 146610 163622 180909 if asset is sold at the end of the year PVIFA @ 6% 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.21 6.802 7.36 Equivalent Annual cost 42018 29024 25208 23719 23169 23089 23272 23609 24055 24580 Answer: the most economic life is of the asset is 6 years as the equivalent annual cost is the minimum. Workings for depreciation, profit /loss on sale, tax adjustment on sale before tax market value at the end of the year 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 Profit / loss on sale if sold at the end of the year -35714 -16224 -3731 3764 7689 11614 15539 15000 10000 5000 Tax shield/tax expense on the above 14286 6490 1492 -1506 -3076 -4646 -6216 -6000 -4000 -2000 Cash inflow on sale - after tax adj 64286 51490 41492 33494 26924 20354 13784 9000 6000 3000 macrs depreciation % 14.286 24.49 17.493 12.495 8.925 8.925 8.925 4.461 depreciation expense 14286 24490 17493 12495 8925 8925 8925 4461 0 0 asset value after depreciation 85714 61224 43731 31236 22311 13386 4461 0 0 0

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