please answer all parts of the question 1. A currently owned machine was purchas

Question

please answer all parts of the question

1. A currently owned machine was purchased 12 years ago for S70,000 with an estimated life of 15 years and S10,000 salvage. SL depr has been used. This machine produces parts at the rate of 3.52 hours per 100 parts, and has an efficiency rating of 80%. The machine requires 3 operators paid a wage rate of $14.56 per hour. The machine is run on one shift only, with overtime scheduled as necessary. Demand for these parts averages 50,000 parts per year. Overtime pay is 50% greater than the base rate. Labor costs are increasing at 4.7% per year. The parts sold last year for $2.60 per part. Future price increases are expected to average 6.1% peryear Maintenance last year was $4500. The machine can be kept running but maintenance will increase by 1 1% per year. The current market value for this machine is $25,000. The tax rate is 40%. a. How much will be realized for this machine after taxes if it were to be sold today? b. Complete the following table. Assume the machine is sold in 3 years for $5000. Rev Labor Maint BTCHF Depr Tax Inc Tax Nom Real yr ATCF 13 14 15 c. Calculate the inflation adjusted rate of return (io) if this machine is kept and then sold at the end of year 15 (three years from now). Inflation is expected to be 3.2, 4.7, and 3.6% for the next 3 years.

Explanation / Answer

a If Machine Sold Today Sales Price           25,000 Less: Book Value           22,000 Gain              3,000 Tax on Gain 40%              1,200 Money realised 25000-1200           23,800 Working Notes: Cost price of Machine           70,000 Salavge Value           10,000 Life                    15 Depreciation P.A.              4,000 Book Value today =70000-4000*12           22,000 Increase in Labor Cost 4.7% per annum Sales= 50000 units at 2.6 per part last year with 6.1% increase every year Maintenance=4500 last year increase by 11% Current mkt Value 40000 Tax rate 40% Assumed a shift is for 8 hrs & 260 working days in a year Total working Hrs =260*8              2,080 Production required           50,000 Hrs required to produce =(50000/100)*(3.52/80%)              2,200 Overtime Required =2200-2080                 120 Overtime Rate =14.56*1.5              21.84 Labor Cost 4.7% increase nullay Normal labor Cost =2080*14.56           30,285 Overtime =120*21.84              2,621 Labor Cost per worker           32,906 Total Labor Cost 3*32906           98,718 Residual value of Machine           10,000 Sales Value              5,000 Loss on Sale of Machine 10000-5000              5,000 Tax Saving @ 40%              2,000 Net Inlow 5000+2000              7,000 ATCF/(1+Infl Rate) Year Capital (outflow)/Inflow Sales Labor Maint. BTCF Depn Tax Income Tax ATCF Real ATCF 0 13                                   1,37,930     (1,03,358)             (4,995)             29,577 4000      25,577        10,231      19,346          18,747 14                                   1,46,344     (1,08,215)             (5,544)             32,584 4000      28,584        11,434      21,150          20,201 15 7000                                   1,55,271     (1,13,301)             (6,154)             35,815 4000      31,815        12,726      30,089          29,043 Total Inflow          67,991 c Adjusted rate of return real ATCF Dis. Rate at 65% Dis, Rate at 70% 0                              (25,000)                                                 1         (25,000) 1           (25,000) 1                                18,747                                       0.6061           11,362             0.5882             11,027 2                                20,201                                       0.3673              7,420             0.3460                6,990 3                                29,043                                       0.2226              6,465             0.2035                5,912                 247             (1,071) irr=65+247/(247+1071)*(70-65) 65.94%

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