Question

(LG 8.5, 8.10) What is the after-tax present worth of a chip placer if it costs $55 000 and saves $17 000 per year? After-tax interest is 10 percent. Assume the device will be sold for a $1000 salvage value at the end of its six-year life. The CCA rate is 20 percent and the corporate income tax rate is 54 percent.

Answer 1

The after-tax present worth of a chip placer is -$20,786.34.

Step-by-step explanation:

To calculate the after-tax present worth of a chip placer, we need to consider the initial cost of $55,000, the annual savings of $17,000, the salvage value of $1,000 at the end of the six-year life, the after-tax interest rate of 10%, the CCA rate of 20%, and the corporate income tax rate of 54%.

First, we calculate the tax savings using the CCA rate and the annual savings: $17,000 * 20% = $3,400. Then, we calculate the after-tax present worth of the savings using the after-tax interest rate: $3,400 / (1 + 10%)^1 + $3,400 / (1 + 10%)^2 + ... + $3,400 / (1 + 10%)^6 = $16,580.04. Finally, we calculate the present worth of the initial cost and the salvage value: -$55,000 / (1 + 10%)^1 + $1,000 / (1 + 10%)^6 = -$37,366.38. The after-tax present worth of the chip placer is the sum of the savings and the present worth of the initial cost and the salvage value: $16,580.04 - $37,366.38 = -$20,786.34.