Question

2. Elias wants to perform an after-tax evaluation of equivalent methods to electrostatically remove airbome particulate matter from clean rooms used to package liquid pharmaceutical products. Using the information shown, MACRS depreciation with n= 3 year, a 5-year study period, after-tax MARR = 7% per year, a T. of 34% and a spreadsheet, he obtained the results AWA - S-2176 and AW8 - $3545. Any tax effects when the equipment is salvaged were neglected. Method B was the better method. Use classical SL depreciation with n=5 years to select the better method after taxes on an annual worth basis. Calculate the CFAT series for each method, filling in the CFAT tables below. State the AW of CFAT for each method using standard conversion factor notation and calculate the actual after-tax AW's. Is the decision different from that reached using MACRS? First cost, $ Salvage value, $ Savings, S per year AOC, S per year Expected life, years Method A -100,000 10,000 35,000 -15,000 Method B - 150,000 20,000 45,000 -6,000 Method A: Year GI, S 0 E , S P and S, S D,S TI, S Taxes, S CFAT, S Method B: Year GI, S E , S P and S, S D, S TI, S Taxes, $ CFAT, S 0 111

Answer 1

Method A:

Formula 34%*TI TI-T+D CFAT/(1+7%)^n Year (n) (GI-E-D); Year 5: PS + (GI-E-D) Initial cost & salvage value Depreciation Taxable Gross income (GI) Expenses ("E) (PS) (D) income (TI) 100000 15000 20000 35000 15000 20000 35000 15000 20000 0 35000 15000 20000 350001 15000 10000 20000 200000 10000 PV of CFAT -100000 18691.59 17468.77 35000 Taxes (T) CFAT -100000 20000 20000 0 20000 20000 34001 26600 Total PV 3 16325.96 15257.901 18965.43 -13290.34

AW = Total PV*(A/P,7%,5) = -13,290.34*0.2439 = -3,241.39 (Method A)

Method B:

(GI-E-D); Year 5: PS + (GI-E-D) Formula 34%*TI TI-T+D CFAT/(1+7%)^n Taxable income (TI) Year (n) Gross income (GI) 45000 45000 45000 45000 45000 Initial cost & salvage value Depreciation Expenses (E) (PS) (D) 150000 60001 30000 6000 30000 6000 30000 6000 30000 6000 20000 30000 9000 9000 9000 9000 29000 Taxes (T) CFAT -150000 3060 35940 3060 35940 3060 35940 3060 35940 9860 49140 Total PV PV of CFAT -150000 33588.79 31391.39 29337.75 27418.45 35036.14 6772.51

AW = Total PV*(A/P,7%,5) = 6,772.51*0.2439 = 1,651.75 (Method B)

As can be seen, method B is still better than method A.Decision is unchanged.

Formula 34%*TI TI-T+D CFAT/(1+7%)^n Year (n) (GI-E-D); Year 5: PS + (GI-E-D) Initial cost & salvage value Depreciation Taxable Gross income (GI) Expenses ("E) (PS) (D) income (TI) 100000 15000 20000 35000 15000 20000 35000 15000 20000 0 35000 15000 20000 350001 15000 10000 20000 200000 10000 PV of CFAT -100000 18691.59 17468.77 35000 Taxes (T) CFAT -100000 20000 20000 0 20000 20000 34001 26600 Total PV 3 16325.96 15257.901 18965.43 -13290.34

(GI-E-D); Year 5: PS + (GI-E-D) Formula 34%*TI TI-T+D CFAT/(1+7%)^n Taxable income (TI) Year (n) Gross income (GI) 45000 45000 45000 45000 45000 Initial cost & salvage value Depreciation Expenses (E) (PS) (D) 150000 60001 30000 6000 30000 6000 30000 6000 30000 6000 20000 30000 9000 9000 9000 9000 29000 Taxes (T) CFAT -150000 3060 35940 3060 35940 3060 35940 3060 35940 9860 49140 Total PV PV of CFAT -150000 33588.79 31391.39 29337.75 27418.45 35036.14 6772.51