An assembly operation at a software company currently requires $90,000 per year
ID: 2800004 • Letter: A
Question
An assembly operation at a software company currently requires $90,000 per year in labor costs. A robot can be purchased and installed to automate this operation, and the robot will cost $193,000 with no MV at the end of its 10-year life. The robot, if acquired, will be depreciated using SL depreciation to a terminal BV of zero after 10 years. Maintenance and operation expenses of the robot are estimated to be $60,000 per year. The company has an effective income tax rate of 40%. Invested capital must earn at least 7% after income taxes are taken into account.
a. The after-tax IRR under the SL method is___% (Round to one decimal place.)
b. The after-tax IRR under the MACRS method is___%.(Round to one decimal place.)
GDS Recovery Rates (rk) Year7-year Property Class 2 3 4 5 6 7 8 0.1429 0.2449 0.1749 0.1249 0.0893 0.0892 0.0893 0.0446Explanation / Answer
a. Computation of after tax IRR by using straight line method:
Year
Cash flows
Depreciation
taxable income
Tax at 40%
Income after tax
Cash flows after tax
0
(193,000)
-
(193,000)
(193,000)
(193,000)
1
90,000-60,000= 30,000
19,300
49,300
19,720
29,580
48,880
2
30,000
19,300
49,300
19,720
29,580
48,880
3
30,000
19,300
49,300
19,720
29,580
48,880
4
30,000
19,300
49,300
19,720
29,580
48,880
5
30,000
19,300
49,300
19,720
29,580
48,880
6
30,000
19,300
49,300
19,720
29,580
48,880
7
30,000
19,300
49,300
19,720
29,580
48,880
8
30,000
19,300
49,300
19,720
29,580
48,880
9
30,000
19,300
49,300
19,720
29,580
48,880
10
30,000
19,300
49,300
19,720
29,580
48,880
IRR
21.80%
b. Computation of after tax IRR by using MACRS method:
Year
Cash flows
Depreciation
taxable income
Tax at 40%
Income after tax
Cash flows after tax
0
(193,000)
-
(193,000)
(193,000)
(193,000)
1
30,000
27,580
57,580
23,032
34,548
62,128
2
30,000
47,266
77,266
30,906
46,359
93,625
3
30,000
33,756
63,756
25,502
38,253
72,009
4
30,000
24,106
54,106
21,642
32,463
56,569
5
30,000
17,235
47,235
18,894
28,341
45,576
6
30,000
17,216
47,216
18,886
28,329
45,545
7
30,000
17,235
47,235
18,894
28,341
45,576
8
30,000
8,608
38,608
15,443
23,165
31,772
9
30,000
-
30,000
12,000
18,000
18,000
10
30,000
-
30,000
12,000
18,000
18,000
IRR
29.69%
Year
Cash flows
Depreciation
taxable income
Tax at 40%
Income after tax
Cash flows after tax
0
(193,000)
-
(193,000)
(193,000)
(193,000)
1
90,000-60,000= 30,000
19,300
49,300
19,720
29,580
48,880
2
30,000
19,300
49,300
19,720
29,580
48,880
3
30,000
19,300
49,300
19,720
29,580
48,880
4
30,000
19,300
49,300
19,720
29,580
48,880
5
30,000
19,300
49,300
19,720
29,580
48,880
6
30,000
19,300
49,300
19,720
29,580
48,880
7
30,000
19,300
49,300
19,720
29,580
48,880
8
30,000
19,300
49,300
19,720
29,580
48,880
9
30,000
19,300
49,300
19,720
29,580
48,880
10
30,000
19,300
49,300
19,720
29,580
48,880
IRR
21.80%
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