#1 The Acme Manufacturing has a project involving the purchase of equipment for $35,000 that will increase sales of Acme Manufacturing by $ 14,500 per year. The annual running costs of this equipment for the first 3 years are $ 1,000, $ 2,000, and $ 4,000 respectively. It will increase by $ 3,500 every year from then on. The equipment is sold for $ 5,000 at the end of year 5. The MARR for the owner of this equipment is 10%, their tax rate is 20% and they use DDB depreciation assuming 5-year life and $5,000 salvage value.
A - Determine the after tax cash flow of this project.
B - What is the after tax NPV of this project?
Acme Manufacturing has other projects going that are very profitable and will use the tax credit (if any) from this project.
#2 The local independent newspaper had purchased a printing press for $150,000 and has been depreciating it using straight-line depreciation assuming a life of 5 years and resale value of $30,000. The operation of this equipment produces an annual operating profit of $35000. At this moment, that is, at the end of the third year after purchase it is considering two options. Option A is to sell the equipment at $30,000 and put the net proceeds in a bank at 10% for the next two years. Option B is to keep operating the equipment for the next two years and then sell it at $10,000. The newspaper has an MARR of 10% and is giving you $1,000 to advise them as to which alternative to choose. The newspaper's total state and local tax is 45%. Give the detail of your calculations. The newspaper is profitable and can use the tax effects. In solving this problem you have to consider opportunity cost.
The solution uses NPV (Net Present Value) to evaluate projects.