Two machines are being considered to replace an old one. Machine 1 costs $80,000 and Machine 2 costs $120,000. Based on the capacity of these machines, it can be safely estimated that the revenue of Machine 1 will be $30,000 for year 1 and $41,500 for Machine 2. It is also assumed that the capacity could be increased and thereby the revenue by 20% every year for the next few years. The maintenance costs for both machines will be $2,000 and the amount will increase by $5,000 every year for the next few years. According to other companies that use similar machines, these machines are capable of producing products for 5 years before major breakdowns occur. Since this is a rough estimate, you can use straight-line depreciation over the next five years. The marginal tax rate for this company is 40%. a) Assuming an after-tax MARR of 15%, calculate the PW of the after-tax cash flow. b) Perform a sensitivity analysis by changing the after-tax MARR from 10% to 20%. Hint: You can use Excel’s DATA TABLE to facilitate calculations.
Two machines are being considered to replace an old one. Machine 1 costs $80,000 and Machine 2 costs $120,000. Based on the capacity of these machines, it can be safely estimated that the revenue of Machine 1 will be $30,000 for year 1 and $41,500 for Machine 2. It is also assumed that the capacity could be increased and thereby the revenue by 20% every year for the next few years. The maintenance costs for both machines will be $2,000 and the amount will increase by $5,000 every year for the next few years. According to other companies that use similar machines, these machines are capable of producing products for 5 years before major breakdowns occur. Since this is a rough estimate, you can use straight-line
a) Assuming an after-tax MARR of 15%, calculate the PW of the after-tax cash flow.
b) Perform a sensitivity analysis by changing the after-tax MARR from 10% to 20%. Hint: You can use Excel’s DATA TABLE to facilitate calculations.
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