as soon as possible please show a brief work and final answer.
Armano Enterprises, Inc., is considering the purchase of a new machine for $240,000 to replace an existing machine that originally cost $172,500, but currently has a book value of only $63,000. The existing machine is being depreciated over six more years on the straight-line basis method to a zero residual value, but will likely be worth $7,500 at the end of six years. The new machine will be depreciated on an ten-year, straight-line basis to a zero residual value for income tax purposes. It is expected to have a $30,000 resale value at the end of its useful life, which is six years (not ten!!). Operating revenues are expected to be $126,000 at the end of the first year with either machine. They will increase at the inflation rate of 3.0% per year over the six year life of the project. The new machine will produce savings in production costs in the first year of $112,000 (in year-end dollars), and they are expected to increase at 4.0% per year. If Armano purchases the machine, it will immediately have to pay a one-time compliance fee to the local government unit of $10,000. These fees are immediately tax deductible as was the $15,000 that Armano paid a consulting company to provide the financial data above. The real discount rate is 12%, the marginal income tax rate is 35% and the average income tax rate is 30%. Required: (Take a full year's depreciation in the first and last year of the asset's useful life) a. What is the appropriate income tax rate to use in the after-tax analysis of this proposed investment, and why? (5 points) b. Regardless of your answer to part a, assume that the appropriate income tax rate is 40%. Using NPV techniques determine whether Armano should purchase the new machine? It doesn't matter whether you use all real dollars, all nominal dollars, or a combination of the two, but you must proceed correctly! (20 points) Armano Enterprises, Inc., is considering the purchase of a new machine for $240,000 to replace an existing machine that originally cost $172,500, but currently has a book value of only $63,000. The existing machine is being depreciated over six more years on the straight-line basis method to a zero residual value, but will likely be worth $7,500 at the end of six years. The new machine will be depreciated on an ten-year, straight-line basis to a zero residual value for income tax purposes. It is expected to have a $30,000 resale value at the end of its useful life, which is six years (not ten!!). Operating revenues are expected to be $126,000 at the end of the first year with either machine. They will increase at the inflation rate of 3.0% per year over the six year life of the project. The new machine will produce savings in production costs in the first year of $112,000 (in year-end dollars), and they are expected to increase at 4.0% per year. If Armano purchases the machine, it will immediately have to pay a one-time compliance fee to the local government unit of $10,000. These fees are immediately tax deductible as was the $15,000 that Armano paid a consulting company to provide the financial data above. The real discount rate is 12%, the marginal income tax rate is 35% and the average income tax rate is 30%. Required: (Take a full year's depreciation in the first and last year of the asset's useful life) a. What is the appropriate income tax rate to use in the after-tax analysis of this proposed investment, and why? (5 points) b. Regardless of your answer to part a, assume that the appropriate income tax rate is 40%. Using NPV techniques determine whether Armano should purchase the new machine? It doesn't matter whether you use all real dollars, all nominal dollars, or a combination of the two, but you must proceed correctly! (20 points)
