Question

A new Stout engineer who just was hired by Machine Excellence is pushing for a brand new laser machining center. He insists that it is a money maker from the first day. He did not figure the deprecation and the after taxes cash flow (CFAT). Give this rookie engineer a little intelligent guidance here on the CFAT for a ROR analysis of the new laser equipment. Here are the figures for the production machining equipment for making detailed laser signs and complex shapes. Calculate the CFAT and ROR for the end of 6 years. Answer the question: "Is the investment economically viable"?

Depr method: MACRS GDS

Class life: 5 Years

Depr recapture: Taxed as TI

First cost: $550,000

Gross Income:$250,000

Expenses: $80,000

Salvage: 0 in year 6

Effective Tax Rate: 45%

After-tax MARR: 12% per year compounded quarterly

using excel

Answer 1

Computation of CFAT:

Year	BTCF	Depreciation	Income	Taxes at 45%	Income after tax	CFAT = Income after tax + depreciation
0	(550,000)	-			(550,000)	(550,000)
1	170,000	(110,000)	60,000	(27,000)	33,000	143,000
2	170,000	(176,000)	(6,000)	2,700	(3,300)	172,700
3	170,000	(105,600)	64,400	(28,980)	35,420	141,020
4	170,000	(63,360)	106,640	(47,988)	58,652	122,012
5	170,000	(63,360)	106,640	(47,988)	58,652	122,012
6	170,000	(31,680)	138,320	(62,244)	76,076	107,756

Given after tax MARR = 12%,

Year	CFAT	PV at 12%	PV of CFAT
0	(550,000)	1	(550,000)
1	143,000	0.892857	127,679
2	172,700	0.797194	137,675
3	141,020	0.71178	100,375
4	122,012	0.635518	77,541
5	122,012	0.567427	69,233
6	107,756	0.506631	54,593
		NPW	17,095
ROR	13%

Decision: Invest in this project because NPW is positive.