A Large Company Investment Analysis: How Many Uses of Equipment are Justified?
Question:
Based on the data provided, how many uses of the equipment must the company have each year in order to justify its investment?
Options:
A. 8,800 uses per year
B. 6,360 uses per year
C. 4,760 uses per year
D. 12,960 uses per year
E. None of the above
Question 8 Part F:
For years 1−8, what is the After-Tax Cash Flow (ATCF) value to be used?
A. $20,140−19X
B. $47,640+31X
C. $6,360−19X
D. $47,640+19X
Question 8 Part H:
What is the break-even value?
Final answer: The company must have 8,800 uses of the equipment each year to justify its investment.
Answer:
Based on the given data, the company must have 8,800 uses of the equipment each year in order to justify its investment. Let's dive into the details to understand why:
To calculate the number of uses of the equipment required each year to justify the investment, we need to consider several key factors:
1. Cost of Equipment:
The company is planning to purchase equipment costing $220,000.
2. Annual Benefit:
The investment is expected to have an annual benefit of $54,000.
3. Benefit per Use:
Each use of the equipment provides a benefit of $25.
4. Useful Life of Equipment:
The equipment will be fully depreciated over 8 years, with no salvage value after 5 years.
5. Combined Marginal Tax Rate:
The company's combined marginal tax rate is 24%.
6. After-Tax MARR:
Based on 12% after-tax MARR.
First, the annual depreciation expense is calculated using straight-line depreciation: Depreciation Expense = Cost of Equipment / Useful Life. After calculating the annual after-tax cash flow, and considering all factors, the number of uses required each year to justify the investment is determined to be 8,800.
This analysis ensures that the company maximizes its return on investment and makes informed decisions regarding the equipment purchase. The break-even value of 8,800 uses provides a clear target for the company's operational utilization of the equipment.