The Austin Manufacturing Company is considering buying an overhead pulley system. The new system has a purchase price of $150,000, an estimated useful life and MACRS class life of five years, and an estimated salvage value of $10,000. The system is expected to enable the company to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective products made. A total annual savings of $95,000 will be realized if the new pulley system is installed. The company is in the 30 % marginal tax bracket. The initial investment will be financed with 40% equity (company finances) and 60% debt (loan). The interest rate is 12% with the loan to be repaid in equal annual installments over 3 years. a) Compute the after-tax cash flows over the project life. b) Compute NPW at MARR = 12%. c) Is this project acceptable, yes or no, explain?
The Austin Manufacturing Company is considering buying an overhead pulley system. The new system has a purchase price of $150,000, an estimated useful life and MACRS class life of five years, and an estimated salvage value of $10,000. The system is expected to enable the company to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective products made. A total annual savings of $95,000 will be realized if the new pulley system is installed. The company is in the 30 % marginal tax bracket. The initial investment will be financed with 40% equity (company finances) and 60% debt (loan). The interest rate is 12% with the loan to be repaid in equal annual installments over 3 years. a) Compute the after-tax cash flows over the project life. b) Compute NPW at MARR = 12%. c) Is this project acceptable, yes or no, explain?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:The Austin Manufacturing Company is considering buying an overhead pulley system. The new system has a purchase
price of $150,000, an estimated useful life and MACRS class life of five years, and an estimated salvage value of $10,000.
The system is expected to enable the company to economize on electric power usage, labor, and repair costs, as well as
to reduce the number of defective products made. A total annual savings of $95,000 will be realized if the new pulley
system is installed. The company is in the 30 % marginal tax bracket. The initial investment will be financed with 40%
equity (company finances) and 60% debt (loan). The interest rate is 12% with the loan to be repaid in equal annual
installments over 3 years.
a) Compute the after-tax cash flows over the project life.
b) Compute NPW at MARR = 12%.
c) Is this project acceptable, yes or no, explain?
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