case study - powerpoint
sss77
sample_2_case_study.pptxCase Study: Steel Bearing Manufacturing
Frederick Legaspi
Class ID: 32
CON E 430 Case Study
Professor Hossein Hemati
Summer 2016
Introduction
An existing manufacturer would create a new business to just produce steel bearings.
Case Study
The manufacturer needs to know:
Which group of machines to use to maximize their EUAW?
On their choice, what would be the depreciation and book value of its equipment through its useful lifespan?
The Federal income tax after the first year of starting their new manufacturing business?
Cost Parameters
| Equipment A | Equipment b | |
| Interest rate for 15 year loan | 7% | 7% |
| Cost of a Machine | $30,000 | $28,500 |
| Number of Machines | 17 | 17 |
| Cost of equipment | $510,000 | $484,500 |
| Price per Unit | $40.00 | $40.00 |
| Units per year | 26,000 | 25,000 |
| Annual Benefit | $1,040,000 | $1,000,000 |
| Cost of Maintenance / yr | $50,000 | $60,000 |
| Cost of Labor & Material | $650,000 | $650,000 |
| Useful life | 10 years | 15 years |
| Salvage Value | $51,000 | $48,450 |
Equipment A or Equipment B
Calculate the Equivalent Uniform Annual Worth (EUAW)
EUAW = EUAB – EUAC
EUAB is the Equivalent Uniform Annual Benefits
EUAB = Annual Benefits + Salvage Value
Equipment A:
Salvage Value= $51,000(A/F,7%,10) = $51,000(.0724)= $3692.40
EUABA= $1,040,000 + $3692.40 = $1,043,692.40
Equipment B:
Salvage Value = $48,450(A/F,7%,15)= $48,450(.0398)= $1928.31
EUABB= $1,000,000 + $1928.31 = $1,001,928.31
Equipment A or Equipment B
Calculate EUAC (Equivalent Uniform Annual Cost)
EUAC = Cost of equipment + Annual cost of Labor & Material
Equipment A
Cost of Equipment = $510,000(A/P,7%,15) = $510,000(.1098)
=$55,998
EUACA= $55,998 + $650,000 + $50,000= $755,998.00
Equipment B
Cost of Equipment = $484,500(A/P,7%,15) = $484,500(.1098)
= $53,362.80
EUACB = $53,362.80 + $650,000 + $60,000 = $763,198.10
Equipment A or Equipment B
| Equipment A | Equipment B | |
| Annual Benefits | $1,040,000 | $1,000,000 |
| Salvage Value | $51,000 | $48,450 |
| EUAB | $1,043,692.40 | $1,001,928.31 |
| Equipment A | Equipment B | |
| Cost of Equipment | $510,000 | $484,500 |
| Cost of Maintenance/yr | $50,000 | $60,000 |
| Cost of Labor & Material | $650,000 | $650,000 |
| EUAC | $755,998.00 | $763,198.31 |
| EUAW | $287,694.40 | $238,730.21 |
Equipment A has the largest EUAW at $287,694.40
This makes Equipment A the choice of machines to use.
7
Depreciation and Book Value
Finding the depreciation and book value of the bearing production, the Manufacturer will use the modified accelerated cost recovery system (MACRS) depreciation
The equipment has a useful lifespan of 10 years. The MACRS depreciation rates will be from the 10 year property class
t = year
MACRS, r = MACRS percentage rate
Cost Basis, B = the cost of the equipment
dt = depreciation deduction = rt * B
Σdt = total sum of the depreciation
BVt= Book Value = B - Σdt
MACRS Depreciation and Book Value
| Year, t | MACRS, rt | Cost Basis | dt | Σdt | BV=B-Σdt |
| 1 | 10.00 | $510,000 | $51,000 | $51,000 | $459,000 |
| 2 | 18.00 | $510,000 | $91,800 | $142,800 | $367,200 |
| 3 | 14.40 | $510,000 | $73,440 | $216,240 | $293,760 |
| 4 | 11.52 | $510,000 | $58,752 | $274,992 | $235,008 |
| 5 | 9.22 | $510,000 | $47,022 | $322,014 | $187,986 |
| 6 | 7.37 | $510,000 | $37,587 | $359,601 | $150,399 |
| 7 | 6.55* | $510,000 | $33,405 | $393,006 | $116,994 |
| 8 | 6.55 | $510,000 | $33,405 | $426,411 | $83,589 |
| 9 | 6.56 | $510,000 | $33,456 | $459,867 | $50,133 |
| 10 | 6.55 | $510,000 | $33,456 | $493,272 | $16,728 |
| 11 | 3.28 | $510,000 | $22,746 | $510,000 | $0 |
| 100% | $510,000 |
Federal Income Tax
Finding the federal income tax, the new business must pay after the first year of business. The MACRS cumulative dt for the first year will be depreciation.
The new business’s taxable income:
Taxable Income = Gross Income - Expenditures - Depreciation
= $1,040,000 - $700,000 - $51,000 = $289,000
The new business’s taxable income
is between $100,000 - 335,000
Therefore tax rate is 39%
Federal Income Tax = 22,250 + 39%(289,000-100,000)
= $95,960
Conclusion
Through annual cost analysis, EUAW of Equipment A , $287,694.40 is higher than Equipment B, $238,730.21. This should mean the new business should use Equipment A.
The MACRS depreciation and Book Value were calculated for its 10 useful years.
The Federal Income tax were calculated through its MACRS depreciation value after its first year of business. The taxable income was calculated to $289,000 and the federal income taxes were calculated to $95,960.
