Chapter8question18

Chapter8question18 - 8-18 Residual value 10,000 10,000 Cost...

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Unformatted text preview: 8-18 Residual value 10,000 10,000 Cost of new machine Current value of existing machine Cost of old machine - 6 years ago Depreciation of old machine Wages & supervision Materials, supplies etc Insurance and general costs 36,000 New 22,000 Old 72,000 7,200 Old New 18,400 7,500 8,000 5,000 3,600 4,500 30,000 17,000 0 -36,000 22,000 Cost of capital Effective life Tax rate 10% 4 30% Difference 10,900 3,000 -900 13,000 1 13,000 2 13,000 3 13,000 4 13,000 10,000 -10,000 -1,200 11,800 0.6830 8,060 Cost Cost savings Residual value - old machine Residual value - new machine Loss of residual value - old machine Taxation Net Cash flows PV factor NPV [sum of PVs] NPV IRR Taxation Increase in taxable income Depreciation deduction Loss of depreciation deductions Balancing adjustment avoided Balancing adjustment Taxable income Tax 30% -14,000 1.0000 -14,000 17,404 17,404 52.5% -7,800 5,200 0.9091 4,727 -1,200 11,800 0.8264 9,752 -1,200 11,800 0.7513 8,866 13,000 -9,000 22,000 26,000 7,800 13,000 -9,000 - 13,000 -9,000 - - 4,000 1,200 4,000 1,200 13,000 -9,000 -10,000 10,000 4,000 1,200 Conclusion: The firm should invest in the new equipment as the project's NPV is positive. The IRR of the project is significantly higher than the firm's cost of capital. ...
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This note was uploaded on 03/23/2011 for the course ECON 200 taught by Professor 1212 during the Three '11 term at Curtin.

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