Contemporary Engineering Economics 6th Edition by Chan Park

Exercise 39

Consider the following financial information about a retooling project at a computer manufacturing company:
• The project costs $2.5 million and has a five-year service life.
• The retooling project can be classified as seven-year property under the MACRS rule.
• At the end of the fifth year, any assets held for the project will be sold. The expected salvage value will be about 10% of the initial project cost.
• The firm will finance 40% of the project money from an outside financial institution at an interest rate of 10%. The firm is required to repay the loan with five equal annual payments.
• The firm's incremental (marginal) tax rate on the investment is 35%.
• The firm's MARR is 18%.
• With the preceding financial information,
(a) Determine the after-tax cash flows.
(b) Compute the annual equivalent worth for this project.