Problem 16-52 Net Present Value; Internal Rate of Return; Payback; Sensitivity Analysis; Taxes (Sections 2, 3) (LO 16-3, 16-4, 16-6, 16-8)

The management of Tri-County Air Taxi, Inc., is considering the replacement of an old machine used in its helicopter repair facility. It is fully depreciated but it can be used by the corporation through 20x5. If management decides to replace the old machine, James Transportation Company has offered to purchase it for $63,000 on the replacement date. The old machine would have no salvage value in 20x5. If the replacement occurs, a new machine would be acquired from Hillcrest Industries on December 31, 20x1. The purchase price of $1,000,000 for the new machine would be paid in cash at the time of replacement. Due to the increased efficiency of the new machine, estimated annual cash savings of $300,000 would be generated through 20x5, the end of its expected useful life. The new machine is not expected to have any salvage value at the end of 20x5. Tri-Countys management requires all investments to earn a 10 percent after-tax return. The companys tax rate is 30 percent. The new machine would be classified as three-year property for MACRS purposes. Use Appendix A and Exhibit 16-9. for your reference. (Use appropriate factor(s) from the tables provided.) Required: 1. Compute the net present value of the machine replacement investment. 3. Compute the payback period for the replacement of the machine. 4. How much would the salvage value of the new machine have to be on December 31, 20x5, in order to turn the machine replacement into an acceptable investment?

Future Value and Present Value Tables Table 1 Future Value of $1.00/1 + )" Period 4% 6% 8% 10% 12% 14% 20% 1 1.040 1.060 1.080 1.100 1.120 1.140 1.200 2 1.032 1.124 1.166 1.210 1.254 1.300 1.440 3 1.125 1.191 1.260 1.331 1.405 1.482 1.728 4 1.170 1.263 1.361 1.464 1.574 1.639 2.074 5 1.217 1.335 1.469 1.611 1.762 1.925 2.455 6 1.265 1.419 1.587 1.772 1.974 2.195 2.986 7 1.316 1.504 1.714 1.949 2.211 2.502 3.583 S 1.369 1.594 1.851 2.144 2.476 2.553 4.300 9 1.423 1.690 1.999 2.359 2.773 3.252 5.160 10 1.480 1.791 2.159 2.594 3.106 3.707 6.192 11 1.540 1.898 2.332 2.853 3.479 4.226 7.430 12 1.601 2.012 2.518 3.139 3.396 4.SIS S.916 13 1.665 2.133 2.720 3.452 4.364 5.492 10.699 14 1.732 2.261 2.937 3.798 4.387 6.261 12.839 15 1.501 2.397 3.172 4.177 5.474 7.135 15.407 20 2.191 3.207 4.661 6.723 9.646 13.743 35.338 30 3.243 5.744 10.063 17.450 29.960 50.950 237.330 40 4.801 10.286 21.725 45.260 93.051 188.830 1.469.800 Table II Future Value of a Series of $1.00 Cash Flows (Ordinary Annuity) (1 + r)" - 1 20% Period 1 2 4% 1.000 2.010 3.122 4.247 6% 1.000 2.060 3.134 4.375 8% 1.000 2.050 3.246 4.506 12% 1.000 2.120 3.374 4.779 3 4 5 5.367 10% 1.000 2.100 3.310 4.641 6.105 7.716 9.487 11.436 13.580 15.933 6 5.416 6.633 7.898 9.214 10.583 7 7.336 8.923 10.637 12.488 S 9 14% 1.000 2.140 3.440 4.921 6.610 S.536 10.730 13.233 16.085 19.337 23.045 27.271 32.059 37.581 43.842 91.025 356.790 1.342.000 10 1.000 2.220 3.640 5.368 7.442 9.930 12.916 16,499 20.799 25.959 32.150 39.580 45.497 59.196 72.035 136.690 1,181.900 7.343.900 14.457 16.646 5.637 6.975 8.394 9.593 11.491 13.151 14.972 16.870 18.852 21.015 23.276 36.773 79.058 154.762 6.353 S.115 10.089 12.300 14.776 17.549 20.655 24.133 28.029 32.393 37.230 12.006 13.436 15.026 16.627 18.292 20.024 29.775 56.085 95.026 11 12 13 14 18.977 21.495 24.215 18.531 21.385 24.523 27.976 31.773 57.276 164.496 442.597 15 20 30 40 27.152 45.762 113.283 75.052 241.330 767.090 259,057 Table III Present Value of $1.00 1 (1 + r) Period 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 32% 1 .781 2 962 925 .839 .855 943 -890 .840 .792 .610 926 .857 .794 .735 909 -826 .751 .683 .893 .797 .712 .636 .877 .769 .675 .592 .519 .847 .718 .609 .862 .743 641 552 476 .833 .694 .579 .820 .672 .551 .451 .370 306 .650 524 .423 3 794 .630 .500 .397 .315 .769 .592 .455 .350 .755 574 435 329 477 516 373 5 .822 .747 .681 621 .567 437 402 .341 .291 .269 250 6 .630 564 .583 513 7 8 .790 .760 .731 .703 .676 .705 .665 .627 .592 .558 .507 ,452 .404 410 .354 .305 456 400 .351 .305 .270 .370 .314 .266 .540 .335 .279 .233 .194 .162 275 .222 .179 467 .303 .249 .204 .167 .137 .250 195 .157 .125 .099 .207 .159 .123 227 .178 139 .105 .085 .189 .143 . 108 082 .062 9 .500 424 .144 .361 322 .263 227 .225 .191 094 .073 10 .463 336 .116 11 .650 527 .429 350 .287 .135 094 .079 .066 .056 12 497 469 .319 290 .257 .229 .237 .208 .182 .195 .165 .145 .162 .137 116 .099 .625 .601 .577 .555 .397 .368 .340 .315 .062 .050 13 .112 .092 .075 .062 .112 093 .078 .065 076 .061 049 052 040 .032 .025 .043 .033 .025 .020 .047 .036 .027 021 016 263 .205 .160 039 14 15 -442 417 .125 .105 239 .183 .140 094 .051 040 .031 456 104 051 014 007 .005 .004 20 30 40 .312 .174 .215 .099 .046 .149 057 .022 .037 .007 .073 .020 .005 019 .003 .033 010 .001 .308 .208 .026 ,004 .001 .002 .001 .012 003 .097 011 .001 Table IV Present Value of Series of $1.00 Cash Flows (1-(4+) 1 ) Period 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 25% 26% 28% 30% 1 0.962 0.893 0.877 0.833 0.794 0.781 2 3 0.943 1.833 2.673 3.465 4.212 0.926 1.753 2.577 3.312 3.993 0.909 1.736 2.487 3.170 3.791 1.647 2.322 0.862 1.605 2.246 2.798 3.274 1.336 2.775 3.630 4.452 1.528 2.106 0.847 1.566 2.174 2.690 3.127 0.820 1.492 2.042 2.494 2.864 0.800 1.440 1.952 0.806 1.457 1.981 2.404 2.745 1.690 2.402 3.037 3.605 1.424 1.923 1.392 1.868 0.769 1.361 1.816 4 2.914 3.433 2.589 2.991 2.362 2.689 2.320 2.635 2.241 2.532 2.166 2.436 5 6 7 4.917 5.582 4.623 5.206 4.355 4.868 3.589 4.288 2.885 3.083 2.759 2.937 5.242 6.002 6.733 7.435 S.111 4.111 4.564 4.968 5.328 3.685 4.039 4.344 4.607 3.498 3.812 4.078 4.303 3.326 3.605 3.837 4.031 3.020 3.242 3.421 S 6.210 6.802 7.360 5.747 6.247 5.335 5.759 3.167 3.416 3.619 3.786 3.923 4.639 4.946 5.216 2.951 3.161 3.329 3.463 3.571 9 3.076 3.184 2.643 2.302 2.925 3.019 3.092 3.241 3.366 3.465 3.566 10 6.710 6.145 5.650 4.833 4.494 4.192 3.682 3.269 8.760 5.938 4.327 3.776 3.147 11 12 7.139 7.536 7.904 5.453 5.660 6.495 6.514 7.103 9.395 4.656 4.793 3.335 3.387 5.029 5.197 5.342 7.887 8.384 8.853 9.295 9.712 3.190 6.194 6.424 4.439 4.533 13 3.851 3.912 5.842 4.910 4.035 4.127 4.203 4.265 4.315 9.986 10.563 11.118 3.656 3.725 3.780 3.824 3.859 3.544 3.606 3.656 3.695 3.726 3.427 3.223 3.249 14 8.244 8.559 7.367 7.606 6.628 6.811 6.002 6.142 5,468 5.575 5.00S 5.092 4.611 4.675 3.962 4.001 3.459 3.483 15 3.268 11.470 9.SIS 5.929 5.353 20 30 13.590 17.292 19.793 8.514 9.427 9.779 7.469 8.055 5.244 4.870 4.979 6.623 7.003 7.105 4.460 4.534 4.110 4.160 13.765 15.046 11.258 11.925 6.177 5.517 3.316 3.332 3.954 3.995 3.999 3.30S 3.842 3.346 3.546 3.569 3.571 40 6.234 5.548 4.997 4.544 4.166 3.333 Exhibit 16-9 Selected MACRS Depreciation Percentages as Computed by the RS incorporates half-year convention also incorporates recent modifications in the tax laws MACRS Property Class Year 3-year 5-year 7-year 10-year 1 33.33% 20.00% 14.29% 10.00 2 44.45 32.00 24.49 18.00 1481 19.20 17.49 14.40 7.41 11.52 12.49 11.52 11.52 8.93 9.22 5.76 8.92 7.37 8.93 6.55 4.46 6.55 6.56 10 6.55 3.28 Denotes the year during which the depreciation method switches to the straight line method Source Wed How to Depreciate Property 11 Future Value and Present Value Tables Table 1 Future Value of $1.00/1 + )" Period 4% 6% 8% 10% 12% 14% 20% 1 1.040 1.060 1.080 1.100 1.120 1.140 1.200 2 1.032 1.124 1.166 1.210 1.254 1.300 1.440 3 1.125 1.191 1.260 1.331 1.405 1.482 1.728 4 1.170 1.263 1.361 1.464 1.574 1.639 2.074 5 1.217 1.335 1.469 1.611 1.762 1.925 2.455 6 1.265 1.419 1.587 1.772 1.974 2.195 2.986 7 1.316 1.504 1.714 1.949 2.211 2.502 3.583 S 1.369 1.594 1.851 2.144 2.476 2.553 4.300 9 1.423 1.690 1.999 2.359 2.773 3.252 5.160 10 1.480 1.791 2.159 2.594 3.106 3.707 6.192 11 1.540 1.898 2.332 2.853 3.479 4.226 7.430 12 1.601 2.012 2.518 3.139 3.396 4.SIS S.916 13 1.665 2.133 2.720 3.452 4.364 5.492 10.699 14 1.732 2.261 2.937 3.798 4.387 6.261 12.839 15 1.501 2.397 3.172 4.177 5.474 7.135 15.407 20 2.191 3.207 4.661 6.723 9.646 13.743 35.338 30 3.243 5.744 10.063 17.450 29.960 50.950 237.330 40 4.801 10.286 21.725 45.260 93.051 188.830 1.469.800 Table II Future Value of a Series of $1.00 Cash Flows (Ordinary Annuity) (1 + r)" - 1 20% Period 1 2 4% 1.000 2.010 3.122 4.247 6% 1.000 2.060 3.134 4.375 8% 1.000 2.050 3.246 4.506 12% 1.000 2.120 3.374 4.779 3 4 5 5.367 10% 1.000 2.100 3.310 4.641 6.105 7.716 9.487 11.436 13.580 15.933 6 5.416 6.633 7.898 9.214 10.583 7 7.336 8.923 10.637 12.488 S 9 14% 1.000 2.140 3.440 4.921 6.610 S.536 10.730 13.233 16.085 19.337 23.045 27.271 32.059 37.581 43.842 91.025 356.790 1.342.000 10 1.000 2.220 3.640 5.368 7.442 9.930 12.916 16,499 20.799 25.959 32.150 39.580 45.497 59.196 72.035 136.690 1,181.900 7.343.900 14.457 16.646 5.637 6.975 8.394 9.593 11.491 13.151 14.972 16.870 18.852 21.015 23.276 36.773 79.058 154.762 6.353 S.115 10.089 12.300 14.776 17.549 20.655 24.133 28.029 32.393 37.230 12.006 13.436 15.026 16.627 18.292 20.024 29.775 56.085 95.026 11 12 13 14 18.977 21.495 24.215 18.531 21.385 24.523 27.976 31.773 57.276 164.496 442.597 15 20 30 40 27.152 45.762 113.283 75.052 241.330 767.090 259,057 Table III Present Value of $1.00 1 (1 + r) Period 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 32% 1 .781 2 962 925 .839 .855 943 -890 .840 .792 .610 926 .857 .794 .735 909 -826 .751 .683 .893 .797 .712 .636 .877 .769 .675 .592 .519 .847 .718 .609 .862 .743 641 552 476 .833 .694 .579 .820 .672 .551 .451 .370 306 .650 524 .423 3 794 .630 .500 .397 .315 .769 .592 .455 .350 .755 574 435 329 477 516 373 5 .822 .747 .681 621 .567 437 402 .341 .291 .269 250 6 .630 564 .583 513 7 8 .790 .760 .731 .703 .676 .705 .665 .627 .592 .558 .507 ,452 .404 410 .354 .305 456 400 .351 .305 .270 .370 .314 .266 .540 .335 .279 .233 .194 .162 275 .222 .179 467 .303 .249 .204 .167 .137 .250 195 .157 .125 .099 .207 .159 .123 227 .178 139 .105 .085 .189 .143 . 108 082 .062 9 .500 424 .144 .361 322 .263 227 .225 .191 094 .073 10 .463 336 .116 11 .650 527 .429 350 .287 .135 094 .079 .066 .056 12 497 469 .319 290 .257 .229 .237 .208 .182 .195 .165 .145 .162 .137 116 .099 .625 .601 .577 .555 .397 .368 .340 .315 .062 .050 13 .112 .092 .075 .062 .112 093 .078 .065 076 .061 049 052 040 .032 .025 .043 .033 .025 .020 .047 .036 .027 021 016 263 .205 .160 039 14 15 -442 417 .125 .105 239 .183 .140 094 .051 040 .031 456 104 051 014 007 .005 .004 20 30 40 .312 .174 .215 .099 .046 .149 057 .022 .037 .007 .073 .020 .005 019 .003 .033 010 .001 .308 .208 .026 ,004 .001 .002 .001 .012 003 .097 011 .001 Table IV Present Value of Series of $1.00 Cash Flows (1-(4+) 1 ) Period 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 25% 26% 28% 30% 1 0.962 0.893 0.877 0.833 0.794 0.781 2 3 0.943 1.833 2.673 3.465 4.212 0.926 1.753 2.577 3.312 3.993 0.909 1.736 2.487 3.170 3.791 1.647 2.322 0.862 1.605 2.246 2.798 3.274 1.336 2.775 3.630 4.452 1.528 2.106 0.847 1.566 2.174 2.690 3.127 0.820 1.492 2.042 2.494 2.864 0.800 1.440 1.952 0.806 1.457 1.981 2.404 2.745 1.690 2.402 3.037 3.605 1.424 1.923 1.392 1.868 0.769 1.361 1.816 4 2.914 3.433 2.589 2.991 2.362 2.689 2.320 2.635 2.241 2.532 2.166 2.436 5 6 7 4.917 5.582 4.623 5.206 4.355 4.868 3.589 4.288 2.885 3.083 2.759 2.937 5.242 6.002 6.733 7.435 S.111 4.111 4.564 4.968 5.328 3.685 4.039 4.344 4.607 3.498 3.812 4.078 4.303 3.326 3.605 3.837 4.031 3.020 3.242 3.421 S 6.210 6.802 7.360 5.747 6.247 5.335 5.759 3.167 3.416 3.619 3.786 3.923 4.639 4.946 5.216 2.951 3.161 3.329 3.463 3.571 9 3.076 3.184 2.643 2.302 2.925 3.019 3.092 3.241 3.366 3.465 3.566 10 6.710 6.145 5.650 4.833 4.494 4.192 3.682 3.269 8.760 5.938 4.327 3.776 3.147 11 12 7.139 7.536 7.904 5.453 5.660 6.495 6.514 7.103 9.395 4.656 4.793 3.335 3.387 5.029 5.197 5.342 7.887 8.384 8.853 9.295 9.712 3.190 6.194 6.424 4.439 4.533 13 3.851 3.912 5.842 4.910 4.035 4.127 4.203 4.265 4.315 9.986 10.563 11.118 3.656 3.725 3.780 3.824 3.859 3.544 3.606 3.656 3.695 3.726 3.427 3.223 3.249 14 8.244 8.559 7.367 7.606 6.628 6.811 6.002 6.142 5,468 5.575 5.00S 5.092 4.611 4.675 3.962 4.001 3.459 3.483 15 3.268 11.470 9.SIS 5.929 5.353 20 30 13.590 17.292 19.793 8.514 9.427 9.779 7.469 8.055 5.244 4.870 4.979 6.623 7.003 7.105 4.460 4.534 4.110 4.160 13.765 15.046 11.258 11.925 6.177 5.517 3.316 3.332 3.954 3.995 3.999 3.30S 3.842 3.346 3.546 3.569 3.571 40 6.234 5.548 4.997 4.544 4.166 3.333 Exhibit 16-9 Selected MACRS Depreciation Percentages as Computed by the RS incorporates half-year convention also incorporates recent modifications in the tax laws MACRS Property Class Year 3-year 5-year 7-year 10-year 1 33.33% 20.00% 14.29% 10.00 2 44.45 32.00 24.49 18.00 1481 19.20 17.49 14.40 7.41 11.52 12.49 11.52 11.52 8.93 9.22 5.76 8.92 7.37 8.93 6.55 4.46 6.55 6.56 10 6.55 3.28 Denotes the year during which the depreciation method switches to the straight line method Source Wed How to Depreciate Property 11