Question

New equipment costs $1,219,000 and is expected to last for five years with the salvage value of 13% of the equipment cost. During this time the company will use a 20% CCA rate. The new equipment will save $490,000 annually before taxes. If the company's required rate of return is 8%, determine the PVCCATS of the purchase. Assume a tax rate of 35%. Please show all the calculations by which you came up with the final answer. (5 Points)

Answer 1

Year 1 Year 2 Year 3 Year 4 Year O l -$12,19,000 $4,90,000 $4,90,000 $4,90,000 -$1,21,900 $1,75,536 $3,14,464 Cost of asset Annual cost savings (-) Depreciation Net Income before tax (-) Tax Expense Net Income after tax (+) depreciation Net cash flow from operations Year 5 $1,58,470 $4,90,000 $1,12,343 $3,77,657 -$30,364 $3,47,293 -$2,19,420 $2,70,580 $94,703 $1,75,877 $2,19,420 $3,95,297 $3,68,100 -$1,28,835 $2,39,265 $1,21,900 $3,61,165 Refer calculation below $4,90,000 -$1,40,429 $3,49,571 -$1,22,350 $2,27,221 $1,40,429 $3,67,650 -$1,10,062 $2,04,402 $1,12,343 $1,75,536 $3,79,938 | $4,59,636 Net cashflow during the year PV Factor $3,61,165 0.92593 $3,34,412.04 $3,95,297 0.85734 $3,79,938 0.79383 $12,19,000 1.00000 |-$12,19,000.00 $4,46,828.44 $3,67,650 0.73503 $6,18,106 0.68058 $4,20,672.44 $3,38,903.46 $3,01,606.72 $2,70,233.78 NET PRESENT VALUE Opening WDV Depreciation Closing WDV $12,19,000.00 $10,97,100.00 | $1,21,900.00 $2,19,420.00 $10,97,100.00 $8,77,680.00 $8,77,680.00 $1,75,536.00 $7,02,144.00 $7,02,144.00 $1,40,428.80 $5,61,715.20 $5,61,715.20 | $1,12,343.04 | $4,49,372.16 WDV of asset at the end of year 5 Selling price of asset loss on sale Income from operations Net income during the year Tax expense (86,755 x 35%) $4,49,372.16 $1,58,470.00 -$2,90,902.16 $3,77,656.96 $86,754.80 $30,364.18