Your firm decided it must acquire a new piece of machinery that includes the latest safety...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Your firm decided it must acquire a new piece of machinery that includes the latest safety features required by Occupational Safety and Health Administration (OSHA). The machinery may either be (1) purchased for cash or (2) leased from another company. Ms. Sofia Aschettino, the president of the firm, has requested that you perform an after-tax analysis of these two means of obtaining the machinery when the following estimates and conditions are applicable. (a) The study period is five years and the estimated useful life of the machinery also is five years. Straight-line depreciation is elected with an estimated zero book value at the end of the useful life of the purchased machinery. The effective tax rate is 50%. Also, a 10% investment tax credit can be taken. All recaptured depreciation (if any) is taxed at 50% of the gain. (b) The following interest rates and estimates are use: • The real after-tax MARR (ir) is 10% per year. • Annual inflation (f) is expected to average 8%. ⚫ The combined after-tax MARR (ic) is 18.8% (i.e., ic = (1+0.10)(1 + 0.08) - 1 = 18.8%) (e) Annual savings, operating costs, and maintenance costs, and the terminal market value respond to inflation. In the case of leasing the machinery, the yearly lease payment does not grow with inflation. When purchasing the machinery, depreciation write-offs do not respond to inflation. (d) Annual cash flow estimates: Purchase Lease Savings: $5,000 $5,000 Operating costs: $2,000 $2,000 Maintenance costs: Lease fee: $1,000 Included in lease contract $6,000 (payable at end of year) Table 2: Annual cash flow estimates All of the annual cash flows above have been estimated in real dollars. (e) Investment costs: Purchase machine Initial cost $20,000 Market value $1,500 at end of year 5 (in real dollars) Lease machine Deposit = $1,500 (refundable at end of 5 years with no interest) Table 3: Investment related data Page: VIII (f) Hint: Note that for the Lease Option, there is no depreciation. Therefore, the Actual Income is the Taxable Income, and your ATCF = Taxable Income - Income Tax (g) Based on this information, answer the following questions: (i.) Determine the Present Worth of both options. [4 points] (ii.) Should your firm purchase or lease the machinery? [4 points] (iii.) What will the lease fee have to be for the answer to (i) above to change? [4 points] (iv.) The two systems will be equivalent if the After-tax MARR, ir, is changed to what value? [4 points] (v.) What will the initial cost of the purchase be for the systems to be equivalent? [4 points] Your firm decided it must acquire a new piece of machinery that includes the latest safety features required by Occupational Safety and Health Administration (OSHA). The machinery may either be (1) purchased for cash or (2) leased from another company. Ms. Sofia Aschettino, the president of the firm, has requested that you perform an after-tax analysis of these two means of obtaining the machinery when the following estimates and conditions are applicable. (a) The study period is five years and the estimated useful life of the machinery also is five years. Straight-line depreciation is elected with an estimated zero book value at the end of the useful life of the purchased machinery. The effective tax rate is 50%. Also, a 10% investment tax credit can be taken. All recaptured depreciation (if any) is taxed at 50% of the gain. (b) The following interest rates and estimates are use: • The real after-tax MARR (ir) is 10% per year. • Annual inflation (f) is expected to average 8%. ⚫ The combined after-tax MARR (ic) is 18.8% (i.e., ic = (1+0.10)(1 + 0.08) - 1 = 18.8%) (e) Annual savings, operating costs, and maintenance costs, and the terminal market value respond to inflation. In the case of leasing the machinery, the yearly lease payment does not grow with inflation. When purchasing the machinery, depreciation write-offs do not respond to inflation. (d) Annual cash flow estimates: Purchase Lease Savings: $5,000 $5,000 Operating costs: $2,000 $2,000 Maintenance costs: Lease fee: $1,000 Included in lease contract $6,000 (payable at end of year) Table 2: Annual cash flow estimates All of the annual cash flows above have been estimated in real dollars. (e) Investment costs: Purchase machine Initial cost $20,000 Market value $1,500 at end of year 5 (in real dollars) Lease machine Deposit = $1,500 (refundable at end of 5 years with no interest) Table 3: Investment related data Page: VIII (f) Hint: Note that for the Lease Option, there is no depreciation. Therefore, the Actual Income is the Taxable Income, and your ATCF = Taxable Income - Income Tax (g) Based on this information, answer the following questions: (i.) Determine the Present Worth of both options. [4 points] (ii.) Should your firm purchase or lease the machinery? [4 points] (iii.) What will the lease fee have to be for the answer to (i) above to change? [4 points] (iv.) The two systems will be equivalent if the After-tax MARR, ir, is changed to what value? [4 points] (v.) What will the initial cost of the purchase be for the systems to be equivalent? [4 points]
Expert Answer:
Answer rating: 100% (QA)
a new machinery that adheres to the latest safety features mandated by Occupational Safety and Health Administration OSHA You are tasked to perform an aftertax analysis to decide between purchasing th... View the full answer
Related Book For
Business Law Text and Cases
ISBN: 978-0324655223
11th Edition
Authors: Kenneth W. Clarkson, Roger LeRoy Miller, Gaylord A. Jentz, F
Posted Date:
Students also viewed these finance questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
Ebbers Corporation overstated its ending inventory balance by $15,000 in the current year. What impact will this error have on cost of goods sold and gross profit in the current year and following...
-
Internal Revenue Code Section 162 limits the amount of deductible compensation that a company can pay to the CEO and its top four other most highly paid officers. The limit currently is $1 million...
-
Explain relationships between respondeat superior and the agency relationship.
-
Suppose that revenue has the form where \(h\) can be chosen and \(x\) and \(y\) are random variables. The distribution of \(x\) and \(y\) is symmetric about \((0,0)\); that is, \(-x,-y\) has the same...
-
On January 1, 2012, the Eugene Company ledger shows Equipment $36,000 and Accumulated Depreciation $13,600. The depreciation resulted from using the straight line method with a useful life of 10...
-
HR manager is looking into employee absence. 10% of all plant employees work in the finishing department; 20% of all plant employees are absent excessively; and 7% of all plant employees work in the...
-
The owner of a bowling alley, an engineer by training, purchases a MARGARITA MACHINE for $7,500. For depreciation purposes, the machine has a 5-year recovery period. After two years of usage, it...
-
How do advanced Monte Carlo simulations aid in determining optimal insurance pricing structures and capital reserves for catastrophic events ?
-
Kaelin believes that in 3 0 years he will need $ 8 0 , 0 0 0 to buy a retirement cottage . Assuming he gets an interest rate of 9 % compound annually, how much will he have to invest today to reach...
-
Compute cost of goods sold using the following information. Finished goods inventory, beginning Cost of goods manufactured Finished goods inventory, ending Cost of Goods Sold is Computed as: $ 820...
-
Jarad Rodriguez deposits $10,000 at 10% compounded semiannually. at the start of year 6, Jarad deposits an additional $5,000 that is compounded at the same rate. at the end of 10 years, what is the...
-
A company with 800,000 in assets has sales of $1,000,000. Their net income is $80,000 and $500,000 in liabilities. According to the Dupont Identity, what is the company's ROE? 20.0% 16.0% 8.0% 26.67%...
-
Find the value of Rab in the figure-(e).
-
Briefly describe the following types of group life insurance plans: a. Group term life insurance b. Group accidental death and dismemberment insurance (AD&D) c. Group universal life insurance d....
-
Could the claimants have successfully argued that because they briefly possessed the currency, they had an ownership interest in it? Explain.
-
What are the basic elements of any trust, and what makes up each of those elements in this case?
-
Go to this texts Web site at academic. cengage.com/blaw/clarkson and select Chapter 21. Click on Video Questions and view the video titled Risk of Loss. Then answer the following questions. (a) Does...
-
Mike's Veneer Shop owns a vacuum press that requires annual maintenance. Mike has a contract to cover the maintenance expenses for the next 5 years. The contract calls for an annual payment of \(\$...
-
Give four examples of goods or services that have exhibited inflation in recent years.
-
What is the numeric value of the present worth of the original project (i.e., no changes)? a. -10 b. 20 c. 1,000 d. Cannot be determined from the information given
Study smarter with the SolutionInn App