Please Show All Work: Bridgewell Industries is evaluating the option of purchasi
ID: 2777923 • Letter: P
Question
Please Show All Work:
Bridgewell Industries is evaluating the option of purchasing a fork-lift truck costing $60,000. If purchased, the truck will replace 4 workers, each with an average annual salary of $15,000. However, an experienced fork-lift operator will have to be hired at a salary of $20,000 per year. Fuel and maintenance expense is expected to be $10,000 per year. At the end of its 5-year life, the truck will have a market value of $10,000. Bridgewell uses straight-line depreciation and depreciates the asset to $0, assigns a 10% required rate of return for this type of investment, and has a marginal tax rate of 40%. Should the fork-lift truck be purchased?
Explanation / Answer
Initial cost = $ 60,000
Present value of cash flow:
Annual savings or cost = savings [15000 * 4 ] -cost [20,000 + 10,000]
= 30,000
Present value of After tax savings =After tax savings * PVAF@10%, 5
= 30,000 ( 1 -.40) * 3.79079
= 18000 * 3.79079
= $ 68,234.22
b)Present value of tax shield on depreciation =Tax savings on Annual depreciation *PVAF@10%,5
= [.40 * (60,000 /5 ) ]* 3.79079
= [.40 * 12000 ] * 3.79079
= 4800 * 3.79079
= $ 18195.792
C)After tax sale value = 10000 (1 -.40 ) * PVF@10%,5
= 6000 * .62092
=$ 3725.52
Total present value cash inflow = 68234.22+18195.792+3725.52
= 90155.53
NPV = Present value -II
= 90155.53 - 60000
= $ 30,155.53
Since NPV is positive ,machine should be purchased
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