Question

Honda Motor Co. decides to upgrade a new assembly line to increase productivity. This upgrade requires an initial investment of $3,200,000 and will generate $850,000 revenue

in year 1 of operation. The system will incur $250,000 in maintenance expenses in the first year. The investment cost of all the equipment necessary for upgrading is classified as a 5- year MACRS property for depreciation purposes. The expected salvage value of all the equipment is $200,000 at the end of the project life. The firm pays taxes at a rate of 25% and has a MARR of 18%. The assembly lines have a 6-year life. Revenues for operation will increase at 5% each year and expenses will increase at 3% each year. A loan is to be taken out for 28% of the initial investment amount. The loan will be repaid over the project life in yearly payments, at an annual interest rate of 15%.

Calculate the following:

1. Determine the allowed depreciation amounts (6 points)

2. Calculate the repayment schedule of the loan (6 points)

3. Calculate the Gains/Losses associated with Asset Disposal (2 points)

4. Create the Income Statement (10 points)

5. Develop a Cash Flow Statement (10 points)

6. Is this project justifiable at a MARR of 18%?

   • Calculate the NPV (2 points)

   • Calculate IRR (2 points)

   • State your conclusions. (2 points)

SOLVE MANUALLY

Answer 1

1. allowed depreciation:

$3,200,000 -salvage $200000=$3000000/5years=$600000 per year

2.loan taken 28% of initial investment i.e 28%of $3200000=$896000

repayment schedule of the loan:

years	interest	principle	remaining o/s
1	134400	102356.27	793643.73
2	119046.56	117709.71	675934.02
3	101390.1	135366.17	540567.86
4	81085.18	155671.09	384896.77
5	57734.52	179021.75	205875.02
6	30881.25	205875.02	0

3. Asset salvage value= $200000

after depreciation book value= $3200000-5*600000=$200000

sale will result in no profit no loss