Compute the after-tax simple payback period

Reference no: EM132168367

Question: A firm manufactures padded shipping bags. A cardboard carton should contain 100 bags, but machine operators fill the cardboard cartons by eye, so a carton may contain anywhere from 98 to 123 bags (average = 105.5 bags). Management realizes that they are giving away 51 /2% of their output by overfilling the cartons. The solution would be to weigh each filled shipping carton. Underweight cartons would have additional shipping bags added, and overweight cartons would have some shipping bags removed. If the weighing is done, it is believed that the average quantity of bags per carton could be reduced to 102, with almost no cartons containing fewer than 100 bags. The weighing equipment would cost $18,600. The equipment would be depreciated by straight-line depreciation using a 10-year depreciable life and a $3600 salvage value at the end of 10 years. Assume the $18,600 worth of equipment qualifies for a 10% investment tax credit. One person, hired at a cost of $16,000 per year, would be required to operate the weighing equipment and to add or remove padded bags from the cardboard cartons. 20 0,000 cartons will be checked on the weighing equipment each year, with an average removal of 3.5 padded bags per carton with a manufacturing cost of 3c per bag. This large profitable corporation has a 50% combined federal-plus-state incremental tax rate. Assume a 10-year study period for the analysis and an after-tax MARR of 20%. Compute:

(a) The after-tax present worth

(b) The after-tax internal rate of return

Reference no: EM132168367

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