Tyler Manufacturing is considering replacing one of its fabrication machines with a more advanced model. The current machine can be sold for $50,000 and cost $85,000 annually to operate, excluding depreciation. The additional tax resulting from the sale of the current machine is $2,400. The new machine will cost $55,000 per year to operate (excluding depreciation) and has a purchase price $150,000, installed. Its annual depreciation expense will be $9,500, compared to $10,400 for the current machine. After 5 years, the new machine will be sold for its book value of $102,500. The firm’s cost of capital is 13% and its marginal tax rate is 34%. The net present value of the project is closest to: a. $21,798 b. $22,874 c. $24,198
Initial: -150+50-2.4=-102.4 Operating per year: Operating Costs: -55+85 -9.5 + 10.4 = 30.9 AT : 30.9 * 0.66 = 20.394 Add back Depreciation Diff = -0.9 ATCF: 19.494 TNOCF: 102.5 (No cap gains) -102.4,19.494 for 4 years, 19.494+102.5=121.994 for year 5 NPV=21798 Ans A
you got it cpk
Interesting way of thinking about it cpk I applied ATCF = (change in sales - change in costs)(1-t) + change in depr*t where change is from new to old change in sales = 0 change in oper costs = 55 - 85 = -30 change in depr = 9.5 - 10.4 = -0.9 ATCF = (0 -(-30))(1-0.34) + -.9*(0.34) ATCF = 19.49 Same thing as cpk, just skipping a step with adding back the depreciation difference to effectively only apply the tax rate to depreciation