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 $74,000 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 $1,300,000 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 $420,000 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 14 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 Future Value of $1.000 Period 49 0% 101 149 20% . 100 1.000 1.080 ICO 1.100 1.200 2 1 O 1.166 1210 1.254 0 1440 1125 1.191 1.40 1.-305 12 4 LIO 1.363 1861 1.574 1.609 2014 5 1211 1.338 1611 1.762 1.925 6 1419 1.56 1.772 1.974 2.195 2.936 7 1310 1.50: 1.714 1919 2211 2.502 3.583 8 136 1.851 2.144 2.476 2.353 9 1423 1.690 1.999 2359 2.773 3.100 10 1430 1.191 2.150 20 3.100 3.702 1.596 2.332 2853 3.479 4.226 OF 12 2012 2.518 3.396 4.IS 3.916 13 2.133 2.720 4164 5:492 10 61 14 1.732 2.36 2031 3700 LT 6.261 12.50 15 1.50 297 ULIE 3414 7.135 15.07 20 1612 3.307 4. 67 9.646 13.743 333 3.744 10.063 11450 50.950 237.330 4.301 10.236 21.725 45.200 93.051 151.530 1.109.300 Table (1- Future Value of a series of $100 Cash Flows Ordinary Annuity a +1 F Period 4% 0% 10% 12% 20 1 1.000 1.000 1.000 1.000 2 2010 2.000 2.000 2.100 2.120 2.140 2.230 3.122 3310 30 360 4 4.247 4375 1506 4.6.11 4.779 5.364 5 5.410 561 5.561 6.100 6.353 6.610 7:42 6 661 6975 7.3.36 7.716 3.115 3.5.36 200 7.590 5.239 8.92 9.437 10.000 10.7.30 12.910 8 Fico 9 10601 14 12.00 1323 16. 20790 9 10.5 11.491 12483 13.500 14.76 16.065 10 1200 13.151 14487 15.95 17.540 19337 35.00 11 13:40 14972 1666 20655 21045 32.150 18531 21 15.00 13.97 24.13 27271 12 13 167 16870 15 210 21.49 34523 73.009 48.497 32.009 3756 14 TI 27.976 51 15 20.034 2017 31.773 37.330 4342 72035 27.157 45.70 20 29.770 57.276 75.052 91005 156.00 30 7005 11330 161496 2010 356700 116000 40 95.026 154.72 299057 442 597 767090 1,342 000 7.343.900 Tabla 1 Present Value of $100 (1+ Period 4% 0% 10% 12% 14% 14% 16% 10% 20% 22% 24% 201 20 30% 32% 943 50983377 362 333 520 00 753 2 390151 3:26.2.200 343 718 094 .612 .000 10 3 000 477 455 435 4 5 747 347 661 621 567 519 476 437 402370 341 315 20 250 546 24751 712.615 541 609 579 551 524 500 .792.335.683 636 592 552 516 482 451 700641364 456 410 370 385 205 215 220 221 2017 731 427 56 407 40 351 395 386 233 20 179157139 10 790 700 668 58313 402 400354 384 299 249 222 193 173 7 143 8 123 10 9 703 92 300 424 361 36263 223 194 167 146 123 105 09 052 10 676 02 5583 396 322270 227 191.162.127.116 085 073 527 49 350.27 237 195 162 135 12 084 079066056 497 397 319.257 206 168 137 112092076 062052943 11 690 TO 011 12 625 036 13 501 19 020 027 469 290 229 182 145 116 093 075 100 940 112 340 26 05 160 125 099 073 062 09009 ON 14 577 025 021 15 555 Ons 020 016 417 315 299 185 140 105 04 06 05 040 001 312 215 14 104 .073061.037 036 019 20 456 014 010 00 005 004 30 174 03 .001.003020012002 004 000 02 100 40 2060 06 001011 005 003 001 DI Table IV Proson value of Sories of $100 Cash Flow - atm) Period 4% 6% 0% 10% 12 18% 101 20% 22% 24% 25% 20% SOE 1 0.962 0.93 0.3.200.06 0.300 0.7940.731 0.70 2 1.330 0.926 0.00 0.9930377 0.362 034 1.783 1736 1600 1690 164 1.566 2577 2 2.40223222246 2.174 1.528 149 1.424 1.392 1.361 1457 1.440 1951 1952 3 2.775 2623 2.106 2042 1.923 1360 1.316 4 3.6.30 3.465 3.037 2914 2798 2.6790 2320 2341 2.166 3.312 3.170 30 3.191 2.599 2494 2.404 252 2.364 2.745 2.09 5 412 3.605 3433 3.27 2.122 2015 2532 2.4.6 6 49 4. 4.11 3655 3.326 3.167 $167 3.020 2.951 2355 2.75 260 7 002 5.58 50 4.366 4.561 435500 3.812 3.00 3.416 32 32423.161 3.063 2.937 2.302 3 6.733 6210 3.747 . 3.35 4.965 4659 454 4078 5619 3.21 3.241 3.07 2.925 7.435 0302 RO 3.750 5.325 4946 100 20 4.03 3.7363 3.366 2.184 3. 10 S.111 7.360 6710 6.145 5.6505216 4.333 4.94 39233652 3.652 3.571 3.465 3.269 3.092 11 5.760 7.387 7.139 6.195 5.935 5453 5.000 4.327 4035 3.776 3656 3.5443335 12 7.536 6.314 4.439 4127 4 127 851 3.725 3.6063357 3.190 13 06 ESSE 7001 7.100 6.194 5600 519 5.1974.193 6.43 53 532 2010 6.625 600 5. 3.000 4.533 3012730 36563427 3.23 14 10.563 7.7 4 265 3962 3.524 15 11.118 5507606 6.12 5575 5.092 4673 4315 4001 3.650 3.75 3.365 20 9.818 514 7.460 6623 66239 59295.353 30 3.316 13 13.0 11470 17.292 13.00 48104460 4.4504110 4110 3.954 4.979 4.534 4160 3.995 30 11.250 9. 3.065 7.003 6.177 5.517 3.500 3.32 40 19.793 15.046 11.925 9.7793.244 7.105 6.234 5.548 4997 4544 4.166 3.990 3.546 3.571 3.330 Exhibit 16-9 Selected MACRS Depreciation Percentages as Computed by the IRS (incorporates half-year convention; also incorporates recent modifications in the tax laws) MACRS Property Class Year 3-year 5-year 7-year 10-year 33.33% 20.00% 14.29% 10.00% 2 44.45 32.00 24.49 18.00 3 14.81* 19.20 17.49 14.40 7.41 11.52* 12.49 11.52 5 11.52 8.93* 9.22 5.76 8.92 7.37 7 8.93 6.55 8 4.46 6.55 6.56 10 6.55 11 3.28 *Denotes the year during which the depreciation method switches to the straight-line method. Source: IRS Publication 946, entitled "How to Depreciate Property