Question

I need this solved step by by step please by hand. Please no Excel. Thank You!

6) (28 points) A company is considering a replacement for an aging machine that has been fully depreciated for tax purposes. The new machine will have an initial cost of $400,000 and is expected to generate an income of $125,000 per year. Its estimated salvage value at the end of its useful life of 4 years will be $60,000. The new machine is a MACRS-GDS 3-year property for calculating depreciation deductions. The effective tax rate is 35%. a) (20 points) For this new machine, determine the after-tax cash flow for each year of operation. (Round off values to the nearest dollar) ΕΟΥ BTCF MACRS-GDS Taxable Tax ATCE Deduction Income 0 1 2 3 4 b) (8 points) If the after-tax MARR is 10% per year compounded annually, compute the PW of the after-ta cash flows. Based on this PW, would you recommend the purchase of this new machine?

Answer 1

a]	EOY	BTCF	MACRS-GDS	Taxable	Tax at 35%	ATCF
			Deduction	Income [2-3]	[4*35%]	[2-5]
	1	2	3	4	5	6
	0	$ (400,000)				$ (400,000)
	1	$         125,000	$        133,320	$          (8,320)	$        (2,912)	$   127,912
			[400000*33.33%]
	2	$         125,000	$        177,800	$        (52,800)	$ (18,480)	$   143,480
			[400000*44.45%]
	3	$         125,000	$           59,240	$          65,760	$        23,016	$   101,984
			[400000*14.81%]
	4	$         185,000	$           29,640	$        155,360	$        54,376	$   130,624
			[400000*7.41%]
b]	EOY	ATCF	PW factor at 10%	PW
	0	$ (400,000)	1	$      (400,000)
	1	$         127,912	0.90909	$        116,284
	2	$         143,480	0.82645	$        118,579
	3	$         101,984	0.75131	$          76,622
	4	$         130,624	0.68301	$ 89,218
	Total			$ 702
	As the PW is positive, the purchase of the new machine is recommended.