Calculations For Depreciation Both Machines

Published Date: 02 Nov 2017

Machine cost = 700,000+ 80,000+20,000 = 800,000

Calculations for depreciation both Machines:

 

Items

Yr 1

Yr 2

Yr 3

Yr 4

Old Machine

Book Value ( beginning of Yr)

80000

60000

40000

20000

Depreciation

20000

20000

20000

20000

Book Value ( end of Yr)

60000

40000

20000

0

New Machine

Book Value ( beginning of Yr)

800000

560000

392000

274400

Depreciation

240000

168000

117600

82320

Book Value ( end of Yr)

560000

392000

274400

192080

 

Incremental Depreciation

220000

148000

97600

62320

Total capital expenditure in first year = 696,000

Salvage value for the machine = 50000 + (192080-50000)*(0.4) = 106832

Cash flow table

Items

Yr 0

Yr 1

Yr 2

Yr 3

Yr 4

Operating Expenses

 

290000

290000

290000

290000

Operating Incomes

 

290000

290000

290000

290000

Less Depreciation

 

220000

148000

97600

62320

EBIT

 

70000

142000

192400

227680

Subtract Tax (@40%)

 

28000

56800

76960

91072

Net Income

 

42000

85200

115440

136608

Add Back Depreciation

 

220000

148000

97600

62320

Subtract Replacement Cost

696,000

 

 

 

 

Add Tax Adjusted Salvage Of New Machine

 

 

 

 

106832

Cash Flows

-696,000

262,000

233,200

213,040

305,760

Calculations for Internal Rate of Return:

Average Cash Flow per Year: (262000+233200+213200+213040+305760)/4 = 253500

Estimate of payback period: 696000/253500 = 2.7456

From present factor annuity tables, 2.7456 for a period of 4 years corresponds to a rate of 18%

NPV (@18%) = -696,000 + 262,000*0.847 + 233,200*0.718 + 213,040*0.609 + 305,760*0.516 = -19135

NPV (@17%) = -696,000 + 262,000*0.855 + 233,200*0.731 + 213,040*0.624 + 305,760*0.534 = -5308

NPV (16%) = -696,000 + 262,000*0.862 + 233,200*0.743 + 213,040*0.641 + 305,760*0.552 = 8450

IRR = 16 + {(17-16)/ (-5308-8450)}*(0-8450) = 16.61%

The IRR is approximately equal to 16.61%

At 10% rate:

Thus NPV = -696,000 + 262,000*0.9091 + 233,200*0.8264 + 213,040*0.7513 + 305,760*0.6830 = 103792

So, as NPV > 0 & IRR > hurdle rate, Company should replace old m/c with the new one.

Solution 2:

New machine cost: 475000+5000 = 480,000

Depreciation:

 

Items

Yr 1

Yr 2

Yr 3

Yr 4

New Machine

Book Value ( beginning of Yr)

480000

336000

235200

164640

Depreciation

144000

100800

70560

49392

Book Value ( end of Yr)

336000

235200

164640

115248

Replacement Cost: 480,000-100,000 = 380,000

Salvage Value for New Machine: 115248- (120000-115248)*(0.34) = 113632

Annual Net Incremental Cash Flows:

Items

Yr 0

Yr 1

Yr 2

Yr 3

Yr 4

Total Savings

 

110000

110000

110000

110000

Operating Income

 

110000

110000

110000

110000

Less Depreciation

 

144000

100800

70560

49392

EBIT

 

-34000

9200

39440

60608

Less Tax (@34%)

 

-11560

3128

13409.6

20606.72

Net Income

 

-22440

6072

26030.4

40001.28

Add Back Depreciation

 

144000

100800

70560

49392

Less Replacement Cost

380,000

 

 

 

 

Add Tax Adjusted Salvage Of New Machine

 

 

 

 

113632

Cash Flows

-380,000

121,560

106,872

96,590

203,025

Calculations for Internal Rate of Return:

Average Cash Flow: (121,560 + 106,872 + 96,590 + 203,025)/4 = 132012

Payback period: 380000/132012 = 2.8785

2.8785 For a period of 4 years = 14%

NPV (@14%) = -380,000 + 121,560*0.877 + 106,872*0.769 + 96,590*0.675 + 203,025*0.592 = -5818

NPV (@13%) = -380,000 + 121,560*0.885 + 106,872*0.783 + 96,590*0.693 + 203,025*0.613 = 2653

IRR = 13 + {(14-13)/ (-5818-2653)}*(0-2653) = 13.31%

At 10% hurdle:

NPV = -380,000 + 121,560*0.9091 + 106,872*0.8264 + 96,590*0.7513 + 203,025*0.6830 = 30063

Adam smith can automate as IRR > hurdle rate and NPV > 0

Solution 3:

New Machine cost: 25,000 +2,000 = 27,000

Calculations for depreciation new Machines:

 

Items

Yr 1

Yr 2

Yr 3

Yr 4

Yr 5

New Machine

Book Value ( beginning of yr)

27000

16200

9720

5832

3499

Depreciation

10800

6480

3888

2333

1400

Book Value ( end of Yr)

16200

9720

5832

3499

2100

Replacement Cost: 27,000-6,000 = 21,000

Salvage Value: 5000 - (5000-2100)*(0.35) = 3985

Annual Net Incremental Cash Flows:

Items

Yr 0

Yr 1

Yr 2

Yr 3

Yr 4

Yr 5

Total Savings

 

7500

7500

7500

7500

7500

Technical Support Expense

 

750

750

750

750

750

Operating Income

 

6750

6750

6750

6750

6750

Less Depreciation

 

10800

6480

3888

2333

1400

EBIT

 

-4050

270

2862

4417

5350

Less Tax (@35%)

 

-1418

95

1002

1546

1873

Net Income

 

-2633

176

1860

2871

3478

Add Back Depreciation

 

10800

6480

3888

2333

1400

Less Replacement Cost

21000

 

 

 

 

 

Less Increase In WC

1000

 

 

 

 

 

Add Release of WC

 

 

 

 

 

1000

Add Tax Adjusted Salvage Of New Machine

 

 

 

 

 

3985

Cash Flows

-22000

8168

6656

5748

5204

8862

10% NPV = -22000 + 8168*0.9091 + 6656*0.8264 + 5748*0.7513 + 5204*0.6830 + 8862*0.621 = 4302

Calculations for Internal Rate of Return:

Average Cash (8168 + 6656 + 5748 + 5204 + 8862)/5 = 6928

Payback period: 22000/6928 = 3.1755

3.1755 For a period of 5years =17%

NPV (@17%) = -22000 + 8168*0.855 + 6656*0.731 + 5748*0.624 + 5204*0.534 + 8862*0.456 = 256

NPV (@18%) = -22000 + 8168*0.847 + 6656*0.718 + 5748*0.609 + 5204*0.516 + 8862*0.437= -244

IRR = 17 + {(18-17)/ (-244-256)}*(0-256) = 17.51%

The IRR is approximately equal to 17.51%

It would be better to buy new machine as IRR > hurdle rate and NPV > 0.

Solution 4:

Calculations for depreciation Machines:

 

Items

Yr 1

Yr 2

Yr 3

Yr 4

Yr 5

Yr 6

Yr 7

New Machine

Book Value ( beginning of yr)

1500000

975000

633750

411938

267759

174044

113128

Depreciation

525000

341250

221813

144178

93716

60915

39595

Book Value (end of yr)

975000

633750

411938

267759

174044

113128

73533

Salvage Value of New Machine: 400,000 - (400,000-73,533)*(0.4) = 269,413

Annual Net Incremental Cash Flows:

Items

Yr 0

Yr 1

Yr 2

Yr 3

Yr 4

Yr 5

Yr 6

Yr 7

Sales

 

500000

500000

500000

500000

500000

500000

500000

Cost of production

 

300000

300000

300000

300000

300000

300000

300000

Operating Income

 

200000

200000

200000

200000

200000

200000

200000

Less Depreciation

 

525000

341250

221813

144178

93716

60915

39595

EBIT

 

-325000

-141250

-21813

55822

106284

139085

160405

Less Tax (@40%)

 

-130000

-56500

-8725

22329

42514

55634

64162

Net Income

 

-195000

-84750

-13088

33493

63771

83451

96243

Add Back Depreciation

 

525000

341250

221813

144178

93716

60915

39595

Equipment Cost

1500000

 

 

 

 

 

 

 

Salvage Of New Machine

 

 

 

 

 

 

 

269,413

Cash Flows

-1500000

330000

256500

208725

177671

157486

144366

405251

NPV = -1,500,000 + 330,000*0.9091 +256,500*0.8264 + 208,725*0.7513 + 177,671*0.6830 + 157,486*0.621 + 144,366*0.564 + 405,251*0.513= -322,746

Internal Rate of Return:

Average Cash Flow per Year: (330,000 +256,500 + 208,725 + 177,671 + 157,486 + 144,366 + 405,251)/7 = 240,000

Payback period: 1,500,000/240,000 = 6.25

6.25 for a period of 7 years corresponds to a rate of 2%

NPV (@2%) = -1,500,000 + 330,000*0.980 +256,500*0.961 + 208,725*0.942 + 177,671*0.924 + 157,486*0.906 + 144,366*0.888 + 405,251*0.871= 54,256

NPV (@3%) = -1,500,000 + 330,000*0.971 +256,500*0.943 + 208,725*0.915 + 177,671*0.888 + 157,486*0.863 + 144,366*0.837 + 405,251*0.813= -2721

IRR = 2 + {(3-2)/ (-2721-54256)}*(0-54265) = 2.95%

The IRR is approximately equal to 2.9

Thus we should not go ahead with the project as NPV is negative