A tubing manufacturer must purchase a long furnace to ensure specific metallurgical properties of the product meet advertised or negotiated specifications. The furnace has various chambers, each of which is monitored and controlled. The tubing moves throughout the various chambers and is then cut and stacked. The cost of the furnace is $6,750,000. It provides a net income of $1,600,000 per year. It is in the MACRS-GDS 7-year property class, but will actually have a useful life of 10 years and have a salvage value of $350,000 at the end of that time. The income tax rate is 25%. The after-tax MARR is 9%.

Find the before-tax and after-tax PW, FW, AW, IRR, and ERR of the investment.

Click here to access the MACRS-GDS Property Classes. Click here to access the MACRS-GDS percentages page. Click here to access the MACRS-GDS percentages for 27.5-year residential rental property.

Click here to access the TVM Factor Table calculator.

PWBT =$L1PWAT =$L4FWBT =$L2FWAT =$L5AWBT =$L3AWAT =$L6IRRBT =L7 %IRRAT =L9 %ERRBT =L8 %ERRAT =L10 %

Carry all interim calculations to 5 decimal places and then round your final answers for PW, FW, and AW to a whole number. Round your final answers for IRR and ERR to 3 decimal places. The tolerance for PW, FW, and AW is 200 and the tolerance for IRR and ERR is 0.020.

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Assistance Used

Hint

Assistance Used

If $3,140,000 will be borrowed at a rate of 10%, find the after-tax cash flow and calculate PW, FW, AW, IRR, and ERR. Assume loan Repayment Plan 2 is used where we make equal principal payments, plus interest on the unpaid balance at the end of the period.

Click here to access the MACRS-GDS Property Classes. Click here to access the MACRS-GDS percentages page. Click here to access the MACRS-GDS percentages for 27.5-year residential rental property.

Click here to access the TVM Factor Table calculator.

PWAT =$L11FWAT =$L12AWAT =$L13IRRAT =L14 %ERRAT =L15 %

Carry all interim calculations to 5 decimal places and then round your final answers for PW, FW, and AW to a whole number. Round your final answers for IRR and ERR to 3 decimal places. The tolerance for PW, FW, and AW is 200 and the tolerance for IRR and ERR is 0.020.

eTextbook and Media

Hint

If $3,140,000 will be borrowed at a rate of 10%, find the after-tax cash flow and calculate PW, FW, AW, IRR, and ERR. Assume loan Repayment Plan 3 is used, where we make equal end-of-period payments.

Click here to access the MACRS-GDS Property Classes. Click here to access the MACRS-GDS percentages page. Click here to access the MACRS-GDS percentages for 27.5-year residential rental property.

Click here to access the TVM Factor Table calculator.

PWAT =$L16FWAT =$L17AWAT =$L18IRRAT =L19 %ERRAT =L20 %

Carry all interim calculations to 5 decimal places and then round your final answers for PW, FW, and AW to a whole number. Round your final answers for IRR and ERR to 3 decimal places. The tolerance for PW, FW, and AW is 200 and the tolerance for IRR and ERR is 0.020.

eTextbook and Media

Hint

Which loan payment plan (Plan 2 or Plan 3) is preferable using an after-tax analysis?

Loan Repayment Plan 2

Loan Repayment Plan 3

None of them