Question 2 (25 points) Your firm is considering the installation of a new machin

Question

Question 2 (25 points) Your firm is considering the installation of a new machine for finished plastic parts manufacture that costs $275,000. The machine is expected to generate net income of $88,000 per year for the next 4 years. Using MACRS depreciation, SO salvage value, a federal tax rate of 34%, a state tax rate of 8.5%, and an after-tax MARR of 10%, determine the net present worth of this investment. Year Before-Tax Depreciation Taxable Income Income Taxes After-Tax Present Worth Cash Flow Cash Flow 0 2 3 4

Explanation / Answer

The initial outlay = 275000 (as this is the cost of installing the new machine)

The after tax cashflow = (sales-cost-depreciation)*(1-t)+Depreciation
=Net income + depreciation

Depreciation according to MACRS is:

Machine Value

275000

Years

Beginning Value

MACRS

Depreciation

Ending Value

1

275000

33.33%

91657.5

183342.5

2

183342.5

44.45%

122237.5

61105

3

61105

14.81%

40727.5

20377.5

4

20377.5

7.41%

20377.5

0

Thus NPV is:

Years

Net income

Depreciation

ATNOCF

0

-275000

1

88000

91657.5

179657.5

2

88000

122237.5

210237.5

3

88000

40727.5

128727.5

4

88000

20377.5

108377.5

NPV at 10%

$211,648.33

Machine Value

275000

Years

Beginning Value

MACRS

Depreciation

Ending Value

1

275000

33.33%

91657.5

183342.5

2

183342.5

44.45%

122237.5

61105

3

61105

14.81%

40727.5

20377.5

4

20377.5

7.41%

20377.5

0

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