Contemporary Engineering Economics (6th Edition)
Contemporary Engineering Economics (6th Edition)
6th Edition
ISBN: 9780134105598
Author: Chan S. Park
Publisher: PEARSON
Question
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Chapter 12, Problem 1P

(a):

To determine

Calculate the net cash flow.

(a):

Expert Solution
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Explanation of Solution

The recovery rate (RR) under the General Depreciation System for five year is given in Table-1.

                    Table-1

YearRR
10.2
20.32
30.192
40.1152
50.1152
60.0576

Taxable gain (TG) can be calculated as follows.

TG=(Salvage value(Investment(D1+D2+...+Dn)))TR=(30,000(100,000(20,000+32,000+9,600)))(0.4)=3,360

Taxable gain is -$3,360.

Table 2 shows the after tax cash flow. Column 2 is equal to net annual revenue. Column 3 is obtained by multiplying the RR value with the investment. When the investment is retired before its life time, then half of the depreciation is captured in the last year. Column 4 is obtained by subtracting the column 3 from column 2. Column 5 is obtained by multiplying the tax rate with column 4. Column 6 is obtained by subtracting the column 5 from column 2. Last year net cash flow is added with salvage value and subtract the taxable gain from it. Present worth (PW) can be obtained by multiplying the (1(1+i)n) with respective ATCF.

Table-2

1234567
YearBTCFDTITAXATCFPW
0-100,000   -100,000-100,000
145,00020,00025,00010,00035,00030,435
245,00032,00013,0005,20039,80030,095
345,00019,20025,80010,32064,20042,213
4     2,742

Present wroth is $2,741. Since the project has positive present worth, it is acceptable.

(b):

To determine

Calculate the new net cash flow.

(b):

Expert Solution
Check Mark

Explanation of Solution

The required investment is become $110,000. Labor saving should be $50,744 so that the project present worth would become $0 with the MARR 15%. This could be verified by using the same procedure done in part ‘a’.

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