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Project -
ABC Company is considering the purchase of a computer-aided manufacturing system. The annual before tax cash benefits/savings associated with the system are described below:
Decreased Waste cost
$70,000
Decrease in operating costs
50,000
Increase in on-time deliveries savings
75,000
The system will cost
$450,000
Useful life
8 year
Salvage value
0
Cost of Capital
10%
Tax Rate
32%
Required: Prepare your solution on the worksheet entitled Solution.
1. Compute the net annual after-tax cash benefits and savings. Use the information above to compute the total annual savings and then you need to compute the net of tax savings.
2. Compute the depreciation tax shield.
3. Set up a table showing the outflow and annual cash inflow.
4. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of 5 years or less. Should the company buy the system based on the payback period criteria? Why?
5. Calculate the NPV and IRR for the projects. Should the system be purchased based on the NPV and IRR criteria? Why or Why not?
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