Nordique Fab is an Arizona company dedicated to circuit board design and fabrication. It has acquired new stations and software for its three facilities at a cost of $450,000 per site. The estimated MV for each cystm systemg the fourth year is expected to be 5% of the total capital investment, at which time the systems will be sold. The company believes that use of the new systems will enhance their circuit design business resulting in annual income of $1,000,000. annual operating and maintenance costs will be approximately $220,000. The company's marginal effective tax rate is 35% and the MARCS depreciation method (5 year GDS recovery period) will be used. Determine the after tax cash flow for this project. If the after tax MARR is 20% per year, would you recommend this investment?
Nordique Fab is an Arizona company dedicated to circuit board design and fabrication. It has acquired new stations and software for its three facilities at a cost of $450,000 per site. The estimated MV for each cystm systemg the fourth year is expected to be 5% of the total capital investment, at which time the systems will be sold. The company believes that use of the new systems will enhance their circuit design business resulting in annual income of $1,000,000. annual operating and maintenance costs will be approximately $220,000. The company's marginal effective tax rate is 35% and the MARCS depreciation method (5 year GDS recovery period) will be used. Determine the after tax cash flow for this project. If the after tax MARR is 20% per year, would you recommend this investment?
Related questions
Carlisle company is in need of new production line equipment that will increase the throughput and allow them to meet anticipated demand for the next 10 years. This equipment is the H5500 Robotics platform which has proven to be highly reliable when installed at the companyâs other divisions. The shipping costs, sales tax, installation cost for the H5500 will be $120,000. The equipment itself will cost $380,000. The operating and maintenance costs for the equipment is anticipated to be $30,000 per year escalating at the rate of inflation of 3% per year. The companyâs tax rate is 30%. If the annual receipts are as shown in the table below and using a straight line depreciation what is the companyâs anticipated before and after tax profit per year. Note, the salvage value of the equipment is expected to be $50000 at the end of the 10th year.
| EOY | Annual Receipts |
| 0 | 0 |
| 1 | $200,000.00 |
| 2 | $250,000.00 |
| 3 | $300,000.00 |
| 4 | $300,000.00 |
| 5 | $300,000.00 |
| 6 | $350,000.00 |
| 7 | $400,000.00 |
| 8 | $350,000.00 |
| 9 | $200,000.00 |
| 10 | $150,000.00 |
If the companyâs MARR is 15%
Is this a viable project?
Total Receipts & Disbursements Before Taxes
| EOY | Investments | Annual Receipts | Annual O&M |
| 0 | -$500,000.00 | $0.00 | |
| 1 | $200,000.00 | -$30,000.00 | |
| 2 | $250,000.00 | -$30,900.00 | |
| 3 | $300,000.00 | -$31,827.00 | |
| 4 | $300,000.00 | -$32,781.81 | |
| 5 | $300,000.00 | -$33,765.26 | |
| 6 | $350,000.00 | -$34,778.22 | |
| 7 | $400,000.00 | -$35,821.57 | |
| 8 | $350,000.00 | -$36,896.22 | |
| 9 | $200,000.00 | -$38,003.10 | |
| 10 | $50,000.00 | $150,000.00 | -$39,143.20 |
Have I identified all my cash flows now to determine my net cash flow (NCF)?
Total Receipts & Disbursements Before Taxes w/Depreciation
The depreciable amount is: $500,000 - $50,000 = $450,000
Useful Life is 10 Years
Depreciation per year: $450,000/10 = $45,000
| EOY | Investments | Annual Receipts | Annual O&M | Annual Depreciation |
| 0 | -$500,000.00 | $0.00 | $0.00 | $0.00 |
| 1 | $200,000.00 | -$30,000.00 | -$45,000.00 | |
| 2 | $250,000.00 | -$30,900.00 | -$45,000.00 | |
| 3 | $300,000.00 | -$31,827.00 | -$45,000.00 | |
| 4 | $300,000.00 | -$32,781.81 | -$45,000.00 | |
| 5 | $300,000.00 | -$33,765.26 | -$45,000.00 | |
| 6 | $350,000.00 | -$34,778.22 | -$45,000.00 | |
| 7 | $400,000.00 | -$35,821.57 | -$45,000.00 | |
| 8 | $350,000.00 | -$36,896.22 | -$45,000.00 | |
| 9 | $200,000.00 | -$38,003.10 | -$45,000.00 | |
| 10 | $50,000.00 | $150,000.00 | -$39,143.20 | -$45,000.00 |
Total Receipts & Disbursements Before Taxes Net Cash Flow (NCF)
| EOY | Investments | Annual Receipts | Annual O&M | Annual Depreciation | Before Tax NCF |
| 0 | -$500,000.00 | $0.00 | $0.00 | $0.00 | -$500,000.00 |
| 1 | $200,000.00 | -$30,000.00 | -$45,000.00 | $125,000.00 | |
| 2 | $250,000.00 | -$30,900.00 | -$45,000.00 | $174,100.00 | |
| 3 | $300,000.00 | -$31,827.00 | -$45,000.00 | $223,173.00 | |
| 4 | $300,000.00 | -$32,781.81 | -$45,000.00 | $222,218.19 | |
| 5 | $300,000.00 | -$33,765.26 | -$45,000.00 | $221,234.74 | |
| 6 | $350,000.00 | -$34,778.22 | -$45,000.00 | $270,221.78 | |
| 7 | $400,000.00 | -$35,821.57 | -$45,000.00 | $319,178.43 | |
| 8 | $350,000.00 | -$36,896.22 | -$45,000.00 | $268,103.78 | |
| 9 | $200,000.00 | -$38,003.10 | -$45,000.00 | $116,996.90 | |
| 10 | $50,000.00 | $150,000.00 | -$39,143.20 | -$45,000.00 | $115,856.80 |
| EOY | Investments | Annual Receipts | Annual O&M | Annual Depreciation | Before Tax NCF | Taxes | After Tax NCF |
| 0 | -$500,000.00 | $0.00 | $0.00 | $0.00 | -$500,000.00 | $0.00 | -$500,000.00 |
| 1 | $200,000.00 | -$30,000.00 | -$45,000.00 | $125,000.00 | -$37,500.00 | $87,500.00 | |
| 2 | $250,000.00 | -$30,900.00 | -$45,000.00 | $174,100.00 | -$52,230.00 | $121,870.00 | |
| 3 | $300,000.00 | -$31,827.00 | -$45,000.00 | $223,173.00 | -$66,951.90 | $156,221.10 | |
| 4 | $300,000.00 | -$32,781.81 | -$45,000.00 | $222,218.19 | -$66,665.46 | $155,552.73 | |
| 5 | $300,000.00 | -$33,765.26 | -$45,000.00 | $221,234.74 | -$66,370.42 | $154,864.31 | |
| 6 | $350,000.00 | -$34,778.22 | -$45,000.00 | $270,221.78 | -$81,066.53 | $189,155.24 | |
| 7 | $400,000.00 | -$35,821.57 | -$45,000.00 | $319,178.43 | -$95,753.53 | $223,424.90 | |
| 8 | $350,000.00 | -$36,896.22 | -$45,000.00 | $268,103.78 | -$80,431.14 | $187,672.65 | |
| 9 | $200,000.00 | -$38,003.10 | -$45,000.00 | $116,996.90 | -$35,099.07 | $81,897.83 | |
| 10 | $50,000.00 | $150,000.00 | -$39,143.20 | -$45,000.00 | $115,856.80 | -$34,757.04 | $81,099.76 |
Given the Before Tax NCF is in column I - Using Excel: IRR = IRR(I2:I12) = 36%
Given the After Tax NCF is in column k â Using Excel: IRR = IRR(k2:k12) = 24%
Given MARR = 15%, this is an acceptable project since the companyâs after tax IRR is 24%
Repeat the above analysis using a SOYD Depreciation and the following additional information
The Carlisle company in addition to the previous information supplied has applied for and received a tax credit of $15,000 for year 1. It is expected to be the same for each of the remaining 9 years. Note: you will need to research as to what is a tax credit and how is it used.
If the Carlisle Company used a SOYD Depreciation what is the
Before Tax Net Cash Flow?
After Tax Net Cash Flow?
After Tax Rate of Return?
Discuss these results and compare to the previous analysis:
What is different?
Which is better for the company to use, Straight Line or SOYD depreciation?
In your conclusions discuss the ramification on the IRR that depreciation and tax credits have.
