Answered step by step
Verified Expert Solution
Question
1 Approved Answer
12. The Balas Manufacturing Company is considering buying an overhead pulley system. The new system has a purchase price of $150,000, an estimated useful
12. The Balas 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 35% marginal tax bracket. The initial investment will be financed with 40% equity and 60% debt. The before-tax debt interest rate, which combines both short-term and long-term financing, is 12% with the loan to be repaid in equal annual installments over the project life. The company's MARR is 20%. (a) Draw the before-tax cash flow (hint: loan payment is a cash flow). (b) Find the book value at the end of year 5, the capital gain or loss from the sale of the asset, and the associated taxes (from gain) or tax advantage (from loss) for the cash flow in year 5. (c) Calculate the interest paid each year on the loan. (d) Calculate the taxes for years 1 to 5. Use the depreciations from part (b) and any other appropriate deductions (hint: loan interest is a deduction). (e) Draw the ATCF diagram (show and label all cash flows) (f) Draw the net cash flow, determine the PW (20% ), and state the decision to invest or not.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started