An auto repair shop is considering purchasing automated pain

An auto repair shop is considering purchasing automated paint-spraying equipment. The company estimates that the equipment will last five years. Each year, it will save the company S4,000 in paint wasted in the current manual spraying operation. It will also reduce labour costs by S40,000. It is estimated that the machine will incur maintenance costs of $2,000 per year The machine costs $140,000 (installed with all peripherals), and is expected to have a residual value of S10,000 at the end of five years. Top management needs you to determine the internal rate of return for this equipment in order to decide whether to purchase it, and how to fund i You may assume that the company income tax rate is 30%, and for this analysis is paid the year in which it is incurred. You may also assume that for tax purposes, the equipment is depreciated at a rate of 20% of its capital cost. Your answer should be within ± 0.5% of the correct value Clearly show your working

Solution

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		A	B	C	D	E	F
	Year	0	1	2	3	4	5
1	New machine cost savings	-140000
2	Cost savings in paint		4000	4000	4000	4000	4000
3	Labour cost savings		40000	40000	40000	40000	40000
4	Maintenance cost		2000	2000	2000	2000	2000
5	Depreciation = 20%* Capital Cost		28000	28000	28000	28000	28000
6	Net EBIT= Cost savings in paint+ Labour cost savings - Maintenenace cost - Depreciation		14000	14000	14000	14000	14000
7	Tax =EBIT*Tax rate		4200	4200	4200	4200	4200
8	Net Income =EBIT-tax		9800	9800	9800	9800	9800
9	Depreciation		28000	28000	28000	28000	28000
10	After tax salvage value= residual value* ( 1-tax rate)						7000
11	Free Cash Flow=net income+depreciation+after tax residual value	-140000	37800	37800	37800	37800	44800
	IRR	12.07%	IRR(A11:F11)