G&W Machine Shop is evaluating the proposed acquisition of a new milling machine in 2019. The investment at year zero will be $162,000. The milling machine has an estimated service life of five years, with a salvage value of $45,000. With this milling machine, the firm will be able to manufacture 10,000 units per year; the unit price is $17.50. However, it requires a specially trained operator to run the machine. This will entail $60,000 in annual labor, $20,000 in annual material expenses, and another $10,000 in annual overhead (power and utility) expenses. The milling machine falls into the seven-year MACRS class. Also, assume that $64,800 of the $162,000 paid for the investment is obtained through debt financing. The loan is to be repaid in equal annual installments at 12% interest over five years. The remaining $97,200 will be provided by equity (e.g., from retained earnings). Find the year-by-year after-tax net cash flow for the project at a 25% marginal tax rate, and determine the net present worth of the project at the company's MARR of 15% (after tax) TABLE 10.3: Cash Flow Statement for the Milling Machine Project with Debt Financing (Example 10.5) B G 2 Income Statement 3 End of Year 2 3 4 5 Revenue $ 175,000 $ 175,000 $ 175,000 $ 175,000 $175,000 6 Expenses: 7 Labor $ 60,000 $ 60.000 $ 60,000$ 60,000 $ 60,000 8 Materials $ 20.000 $20,000 $20,000 $20,000 $ 20,000 9 Overhead $ 10.000 $ 10.000 $ 10.000 $10,000 $ 10.000 10 Debt Interest $ 7.776 S 6,552 S 5,181 $ 3,646 $ 1,926 11 Depreciation $ 23,143 $ 89,673 $ 28,338 $ 20,242 $ 7.229 12 13 Taxable income $ 54,081 $ 38.775 $ 51,481 $ 61,112 $ 75,845 14 Income Taxes (25%) $ 13,520 $ 9,694 $ 12,870 $ 15,278 $ 18,961 15 16 Net Income $ 40,561 $ 29,081 $ 38.611 $ 45,834 $ 56,884 17 18 Cash Flow Statement =IPMT(12%,2,5,-64800) 19 Operating Activities: 20 Net Income $ 40,561 $ 29,081 $ 38,611 $ 45,834 $ 56,884 21 Depreciation $ 23,143 $ 39,673 $ 28,338 $ 20,242 $ 7.229 22 Investment Activities: 23 Milling machine $ (162.000) 24 Salvage Value --(G24-4-823-SUM(C11:G11)))*0.25 $ 45,000 Gains Tax 45 (406) 26 Working capital $ (25,000) $ 25,000 27 Financing Activities: =PPMT(12%,D3,5,64800) 28 Borrowed Funds $ 64,800 29 Principal Repayment S (10,200) S (11.424) S (12,795) S (14,330) S (16,050) 30 31 Net Cash Flow S(122,200) $ 53,504 $ 57,330 $ 54,154 $ 51,746 $117,657 32 33 34 PW(15%) 91,364-NPV(15%,C31:G31)+B31 35 IRRE 40.15% =IRR(B31:G31,15%) 25 G&W Machine Shop is evaluating the proposed acquisition of a new milling machine in 2019. The investment at year zero will be $162,000. The milling machine has an estimated service life of five years, with a salvage value of $45,000. With this milling machine, the firm will be able to manufacture 10,000 units per year; the unit price is $17.50. However, it requires a specially trained operator to run the machine. This will entail $60,000 in annual labor, $20,000 in annual material expenses, and another $10,000 in annual overhead (power and utility) expenses. The milling machine falls into the seven-year MACRS class. Also, assume that $64,800 of the $162,000 paid for the investment is obtained through debt financing. The loan is to be repaid in equal annual installments at 12% interest over five years. The remaining $97,200 will be provided by equity (e.g., from retained earnings). Find the year-by-year after-tax net cash flow for the project at a 25% marginal tax rate, and determine the net present worth of the project at the company's MARR of 15% (after tax) TABLE 10.3: Cash Flow Statement for the Milling Machine Project with Debt Financing (Example 10.5) B G 2 Income Statement 3 End of Year 2 3 4 5 Revenue $ 175,000 $ 175,000 $ 175,000 $ 175,000 $175,000 6 Expenses: 7 Labor $ 60,000 $ 60.000 $ 60,000$ 60,000 $ 60,000 8 Materials $ 20.000 $20,000 $20,000 $20,000 $ 20,000 9 Overhead $ 10.000 $ 10.000 $ 10.000 $10,000 $ 10.000 10 Debt Interest $ 7.776 S 6,552 S 5,181 $ 3,646 $ 1,926 11 Depreciation $ 23,143 $ 89,673 $ 28,338 $ 20,242 $ 7.229 12 13 Taxable income $ 54,081 $ 38.775 $ 51,481 $ 61,112 $ 75,845 14 Income Taxes (25%) $ 13,520 $ 9,694 $ 12,870 $ 15,278 $ 18,961 15 16 Net Income $ 40,561 $ 29,081 $ 38.611 $ 45,834 $ 56,884 17 18 Cash Flow Statement =IPMT(12%,2,5,-64800) 19 Operating Activities: 20 Net Income $ 40,561 $ 29,081 $ 38,611 $ 45,834 $ 56,884 21 Depreciation $ 23,143 $ 39,673 $ 28,338 $ 20,242 $ 7.229 22 Investment Activities: 23 Milling machine $ (162.000) 24 Salvage Value --(G24-4-823-SUM(C11:G11)))*0.25 $ 45,000 Gains Tax 45 (406) 26 Working capital $ (25,000) $ 25,000 27 Financing Activities: =PPMT(12%,D3,5,64800) 28 Borrowed Funds $ 64,800 29 Principal Repayment S (10,200) S (11.424) S (12,795) S (14,330) S (16,050) 30 31 Net Cash Flow S(122,200) $ 53,504 $ 57,330 $ 54,154 $ 51,746 $117,657 32 33 34 PW(15%) 91,364-NPV(15%,C31:G31)+B31 35 IRRE 40.15% =IRR(B31:G31,15%) 25