Question 5 Original Purchase Price Machine Useful Life Old Equipment can sell for Cost of New Equipment

New Equipment's live With new Equip. output is expected to increase by Cost will be reduced by $ 79,300.00 10 years $ 10,800.00 $ 80,500.00 8 years $ $ 2 year ago

9,000.00 a year aftertax 7,500.00 a year aftertax

a) with after tax of 25% and 14% cost of Capital, what would Salterells' decision be? Answer: NPV = PV(Revenue + Savings) + NPV(New Machine)+NPV( Old Machine) NPV(Revenue) = $ 16,500.00 PVIFr = 14% n 8 Year 1 2 3 4 5 6 PVIFr 0.877192982 0.769468 0.67497 0.59208 0.51937 0.45559 Total After Tax Savings = $ 76,541.25 NPV(New Machine) = $ (66,726.76) NPV ( Manchine) = $ 14,763.45 Ovaral NPV = $ 24,577.95 The decision would be to go in for the new machine.

b) Would a 10% ITC change the analysis? Answer A 10% Investment Tax Credit would reduce current taxes by 0.10(80,500) = $8050. The effective NPV of the New Machine is increased to 58,676.67, and the overall NPV is increased to $3 c) If an inflation rate of 7% a year must be incorporated into the decision, the project acceptable? Answer An inflation rate of 7% will increase nominal revenues, costs and salvage values, but it will have an effect depreciation or after-tax value of the sale of an existing asset (if we assum that the 7% inflation rate was already included in the nominal discount rate). As such, including the inflation will only make the net present value more promising.

7 8 0.39964 0.35056 4.63886

PV is increased to $32,628

acceptable?

t will have an effect on % inflation rate was