Question 7.N: A start-up biotech company is considering making an investme...

Engineering Economy [EXP-20136]

A start-up biotech company is considering making an investment of $100,000 in a new filtration system. The associated estimates are summarized below:

Annual receipts	$75,000
Annual expenses	$45,000
Useful life	8 years
Terminal book value (EOY 8)	$20,000
Terminal market value	$0

Straight-line depreciation will be used, and the effective income tax rate is 20%. The after-tax MARR is 15% per year. Determine whether this investment is an attractive option for the company. (7.9)

The Blue Check Mark means that this solution has been answered and checked by an expert. This guarantees that the final answer is accurate.
Learn more on how we answer questions.

Set up a table (see Figure 7-5) to calculate the after-tax cash flows for this investment:

EOY	BTCF	Depreciation	Taxable Inc	Income Tax	ATCF
0	–$100,000	–	–		–$100,000
1-8	30,000	$10,000	$20,000	–$4,000	26,000
8	0	–	–20000	+ 4,000	4,000

PW (15%) = –$100,000 + $26,000 (P/A, 15%, 8) + $4,000 (P/F, 15%, 8) = $17,977 > 0. The investment is attractive.

7.5

Related Answered Questions

Your company purchased office furniture (asset class 00.11) for $100,000 and placed it in service on August 13, 2013. The cost basis for the furniture is $100,000, and it will be depreciated with the GDS using half-year convention. The expected salvage (market) value of the furniture is $5,000 in

Verified Answer:

From Table 7-2, the GDS recovery period is seven ...

What is the depreciation deduction, using each of the following methods, for the second year for an asset that costs $35,000 and has an estimated MV of $7,000 at the end of its seven-year useful life? Assume its MACRS class life is also seven years. (a) 200% DB, (b) GDS (MACRS), and (c) ADS (MACRS)

Verified Answer:

(a)

d_{2}

=

\frac{2}{7} \l...

Cisco Systems is purchasing a new bar code–scanning device for its service center in San Francisco. The table that follows lists the relevant cost items for this purchase. The operating expenses for the new system are $10,000 per year, and the useful life of the system is expected to be five years.

Verified Answer:

B = $160,000 + $15,000 + $15,000 = $190,000 (a) [...

The income tax-free yield on a certain municipal bond is 7% per year. This translates into approximately a 5% annual yield if the municipal bond’s interest had been taxable in the 28% income tax bracket [7% (1 – 0.28) approx.=5%]. Compare the future worth of the two situations (i.e., nontaxable

Verified Answer:

Non-taxed:

F_{1}

= $15,000 (F/A, 7...

In a chlorine-fluxing installation in a large aluminum company, engineers are considering the replacement of existing plastic pipe fittings with more expensive, but longer lived, copper fittings. The following table gives a comparison of the capital investments, lives, salvage values, and so on of

Verified Answer:

Assume repeatability. Alternative A: Plastic d =...

A drug store is looking into the possibility of installing a “24/7” automated prescription refill system to increase its projected revenues by $20,000 per year over the next 5 years. Annual expenses to maintain the system are expected to be $5,000. The system will have no market value at the end of

Verified Answer:

EOY BTCF Depreciation Taxable Income ...

A high-pressure reactor vessel in a pharmaceutical company was purchased for $200,000. It has a useful life of 10 years, and the vessel can be sold for $30,000 at that time. The vessel will be depreciated with the MACRS method (its class life is five years). Annual net cash flow (revenue less

Verified Answer:

There will be no depreciation taken in year 10. Th...

An office supply company has purchased a light duty delivery truck for $18,000. The truck will be depreciated under the MACRS with a property class of five years. The truck’s MV is expected to decrease by $3,000 per year. It is anticipated that the purchase of the truck will increase the company’s

Verified Answer:

EOY (A) BTCF (B) Depr. (C) = (A) − (B) ...

A new municipal refuse collection vehicle can be purchased for $84,000. Its expected useful life is six years, at which time the market value and book value will be zero. Before-tax cash flow (BTCF) will be+$18,000 per year over the six-year life of the vehicle. (7.9) a. Use straight-line

Verified Answer:

(a) Refer to Figure 7-5 for a template for determi...

A $125,000 tractor-trailer is being depreciated by the SL method over five years to a final BV of zero. Half year convention does not apply to this asset. After three years, the rig is sold for (a) $70,000 or (b) $20,000. If the effective income tax rate is 40%, what is the net cash inflow from

Verified Answer:

BV_{3}

= $125,000 – (3)($125,000/5...