Philadelphia Fastener Corporation manufactures nails, screws, bolts, and other fasteners. Management is considering a proposal to acquire new material-handling equipment. The new equipment has the same capacity as the current equipment but will provide operating efficiencies in labor and power usage. The savings in operating costs are estimated at $150,000 annually. The new equipment will cost $300,000 and will be purchased at the beginning of the year when the project is started. The equipment dealer is certain that the equipment will be operational during the second quarter of the year it is installed. Therefore, 60 percent of the estimated annual savings can be obtained in the first year. The company will incur a one-time expense of $30,000 to transfer production activities from the old equipment to the new equipment. No loss of sales will occur, however, because the processing facility is large enough to install the new equipment without interfering with the operations of the current equipment. The equipment is in the MACRS 7-year property class. The firm would depreciate the machinery in accordance with the MACRS depreciation schedule. The current equipment has been fully depreciated. Management has reviewed its condition and has concluded that it can be used an additional eight years. The company would receive $10,000, net of removal costs, if it elected to buy the new equipment and dispose of its current equipment at this time. The new equipment will have no salvage value at the end of its life. The company is subject to a 40 percent income-tax rate and requires an after-tax return of at least 12 percent on any investment.

Use Appendix A and Exhibit 16-9 for your reference. (Use appropriate factor(s) from the tables provided.)

Required:

1. 1.Calculate the annual incremental after-tax cash flows for Philadelphia Fastener Corporations proposal to acquire the new equipment.

2. 2-a. Calculate the net present value of the proposal to acquire the new equipment using the cash flows calculated in requirement (1), Assume all cash flows take place at the end of the year.

3. 2-b. Should management purchase the new equipment?

MACRS Property Class Year 3-year 5-year 7-year 10-year 1 Exhibit 16-9 Selected MACRS Depreciatior Percentages as Computed by the IRS (incorporates half- year convention; also incorpo rates recent modifications in the tax laws) 33.33% 20.00% 2 44.45 32.00 3 14.81* 19.20 4 7.41 11.52* 5 11.52 6 5.76 7 8 9 10. 11 Denotes the year during which the depreciation method switches to the straight-line method. Source: IRS Publication 946, entitled How to Depreciate Property." 14.29% 24.49 17.49 12.49 8.93* 8.92 8.93 4.46 10.00% 18.00 14.40 11.52 9.22 7.37 6.55* 6.55 6.56 6.55 3.28 Future Value and Present Value Tables Table 1 20 31.00 1.000 1.000 1100 1.120 1264 RE 1.200 1.44 1.72 1.574 1 H 2 2 7 1.710 13 2211 . 2. 4300 2.300 9 17 219 2.773 8.100 34 7 7:43 2.51 R 10 11 12 13 14 15 20 2012 2110 16 12 1801 21 4 5:41 10 12.30 15.401 2.36 8.112 NE 10 BEBE EN 100 21725 OP 20 SV 19 Table II Fun Series of 20 11 1 2 1.000 21 Der Ann 2100 2220 a 302 300 VE 1 5 SO 471 353 8115 7710 7 7. 07 129 14 100 124 14.45 12:30 1471 20 9 10 11 12 RE 1972 TO HES WE AN 2005 M 18 21 DE 2015 14 18 20 22.293 1290 75052 45.1 79068 11:20 154.700.00 5 16.00 T20 To 1.1810 Table III 10 00 ATT nh 716 2 3 .784 78 .712 743 1141 579 500 16 we 519 315 5 5 71 410 TE 11 45 14 3 219 239 794 DOC HE 179 6 A TORREDERDERE 1 110 45 49 290 185 112 297 .257 210 23 200 10 162 137 116 125 112 . 14 205 079 140 145 125 100 061 012 190 215 14 BE SD KU ITE . DIST ber 0 104 02 011 .000 DOO 001 ETE E O POO 10 Table IV 11+ 1 2 1.3 1-63 140 1.5 2.174 1.3 1 1 173 1.606 2577 247 248 2.2 2.24 21 26 2.974 275 St. 1244 1.580 1.450 2.100 2.500 2.404 2.901 2.64 4 3.122 2.745 28 5 . LA? HE 414 101 1 3 1921 32 400 341622 2010 101 1241 2.078 295 21 OS 4 70 11 4.18 4.414 4.001 4.100 12 3511 11 TE 6. 4 3. 1 LICE 4129 0121 SE 10 60 WS 11 E PRIP 114 28 5.368 7.00 1751 4310 4.460 4110 4160 19 5. Samo Reg 1 Reg 2A Reg 2B Calculate the annual incremental after-tax cash flows for Philadelphia Fastener Corporation's proposal to acquire the new equipment. Annual Operation Year 3 Year 4 Year 1 Year 2 Year 5 Year 6 Year 7 Year 8 Cash operating savings Less tax effect Cash savings after tax Depreciation tax shield After-tax operating cash flows $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0$ 0 $ 0 $ 0 $ 0$ 0 Req1 Req 2A >