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GAMBOA FRANCHESCA
,
MARIE Q .

12137308 SECTION E 12

1 A new municipal refuse-collection truck can be purchased for $84,000. Its expected useful life is six years, at
which time its market value will be zero. Annual receipts less expenses will be approximately $18,000 per year
over the six-year study period. Use the PW method and a MARR of 18% to determine whether this is a good
investment.

PRESENT WORTH
=
PW of cash inflows -

PW of cash outflows

1-1-86
"
1- ti -1 _
1
PW i =
MARR = -
84,000 t 18,000 = -
84,000 + 18,000
i 1- 1- in 0.18 1.186

= -

21,043.15

$ 21,043.15 0 : not acceptable ; not a good investment

2 A company is considering constructing a plant to manufacture a proposed new product. The land costs $300,000, the building costs
$600,000, the equipment costs $250,000, and $100,000 additional working capital is required. It is expected that the product will
result in sales of $750,000 per year for 10 years, at which time the land can be sold for $400,000, the building for $350,000, and the
equipment for $50,000. All of the working capital would be recovered at the EOY 10. The annual expenses for labor, materials, and all
other items are estimated to total $475,000. If the company requires a MARR of 15% per year on projects of comparable risk,
determine if it should invest in the new product line. Use the AW method.

CAPITAL INVESTMENT CAPITAL INVESTMENT

= =
-

LC -
BC -

EC -
WC -

LC -
BC -

EC -
WC

Where LC = land cost EC =

Equipment cost 600,000 250,000 100,000
: =
300,000
- -
- -

Bc =
Building cost WC =
working capital =
-

$1,250,000

Revenue / Expected sales =

$750,000 / year

MARKET VALUE =
Slt SB 1- SE MARKET VALUE =
Slt SB 1- SE

where : SL =
sales price of land =
400,000 t 350,000T 50,000

SB = sales price of building =

$ 800,000

SE = sales price of equipment .

§
I 1- + I
"
I $70,261.78 : _ investment should be made in new product line .

ANNUAL WORTH =
50,000-475,000-1,250,000 t 900,000
1- tin -
1 It in _
1

I ° "
"
1- 15
'
"

0-15 1
1750,000-475,000-1,250,000
=
t 900,000

1. 15
"
-1 1.151-0-1
f
= $ 70,261.78
?⃝
 Saab
3 A large automobile manufacturer is considering the installation of a high-tech material handling system for $30,000,000. This
system will save $7,500,000 per year in manual labor, and it will incur $2,750,000 in annual operating and maintenance
expenditures. The salvage value at the end of the system’s 10-year life is negligible. If the company’s hurdle rate (MARR) is
10% per year, should the system be recommended for implementation?

Year Cash Flows Present Value Factor 101 .

Discounted Cash Flows

Investment 0
-

$30,000,000 1
-

$ 30,000,000

Annual Operating cost 1-10

-

$2,750,000 G. 14457
-

$ 16,897,650

Manual Labor savings 1- 10 $7,500,000 6.14457 $46.084,500

Net Present Value -

$813,150

Net present value is negative 's

-

$813,150 0 -
:
implementation is not recommended .

4 A piece of construction equipment (asset class 15.0) was purchased by the Jones Construction Company. The
cost basis was $300,000. (a) Determine the GDS and ADS depreciation deductions for this property. (b) Compute
the difference in PW of the two sets of depreciation deductions in part (a) if i = 12% per year.

a Determine the GDS and ADS depreciation deductions

GDS DEPRECIATION

RECOVERY RATES YEAR dk RECOVERY RATE COST BASIS GDS DEPRECIATION

5- year period rk rate ✗ B

YEAR RATE d1 0.20 300,000 $60,000

1 201 .

dz 0.32 300.000 $96,000

2 321 , d} 0.1920 300,000 $57,600

3 19.2-1 .
d4 0.1152 300,000 $34,560

4 11.521 .
dg 0.1152 300,000 $34,560

/ $17,280
'

5 11.52 i
do 0.0576 300,000

6 5.76.1 .

ADS DEPRECIATION

B 3001000 ADS DEPRECIATION year 21-06

B
dk = 0.5 X year 1 d, =
year 2-6 d, = =
$50,000
N µ ,
= $ 50,000

" ◦ ' °O° 300,000

30° '
°O°
d, =
0.5 × dz = =
$50,000 dg = = $50,000
" ° "°°°
6 6 ,
year 7 dy 0.5
=
= ✗
6

=
$ 25,000
300,000
=
$25,000
3001000
d ,
= =
$50,000 d, = = $50,000
g ,

b compute the difference in PW of two sets of depreciation deduction in part a it i= 121 .

per year .

-5 -6
Pwgpg
=
di 1.12
"
t dz 1.12
-2
td } 1.12
-3
t dy 1.12
-4
td ,
1.12 td , 1.12 Difference in PW =

Pwgpg -
pwap ,

-3
"
I -2 5
1-12-6
'

221,428.95-194.557.67
=
60,000 571600 1.12 34,560 1.12 17,280
-
= t
1.12 t 96.000 1.12 t 1.12 t 34,560 t

PWGDS =
$ 221428.95 =
$ 26,871.28

"
" -
° -7
PWADS =
d, 1.12 t dz to do 1.12 t da 1.12

2 " -7
'

' }
'

1.12 -5
1.12 50,000 1- 12
_ -

=
25,000 t t 50,000 1.12 t 50,000 1.12
-4
+ 50,000 1.12 t 50 ,
000 t 25,000 1.12

PWA =
$ 194,557.67
 Saab
5 A new municipal refuse collection vehicle can be purchased for $84,000. Its expected useful life is 6 years, at which time the
market value and book value will be zero. Before-tax cash flow (BTCF) will be +$18,000 per year over the 6-year life of the
vehicle. (a) Use straight-line depreciation, an effective income tax rate of 40% and an after-tax MARR of 12% to determine the
present worth of the investment. (b) What is the after-tax internal rate of return? (c) Is this vehicle a sound investment? Explain
your answer.

a present worth of investment b After internal rate of return

-

After cash tax flow =

18,000 -

1,600 To find the IRR : 5.242 -

5.123

IRR = 0-04 t 0.01

=
16,400 6- 5.242 -
5.076
1- ti 1
16,400 = 84,000
6
i Iyj = 0.04716

°
1. 12 1 6- =
4.72.1
Iti 1 84,000
-

PW =
16,400 =

6
0.12 1.126 i Iti 16,400

=
$ 67,427.08 i = 5.123
.

/ .

NET PW = -
84,000+67,427.08 c present worth -
$16,572.92 is less than 0 : the vehicle is not a sound investment .

= -

$16,572.92

$16,572.92 0 "
not a sound investment