FreeBird Software has developed partnerships with several large manufacturing corporations to use a Java-derivative software in their consumer and industrial products. A new corporation will be formed to manage these applications. One major project involves using Java in commercial and industrial appliances that store and cook food. The gross income and expenses are expected to follow the relations below for the estimated life of 6 years. For t = 1 to 6 years:
Annual GI = 2,800,000 – 100,000t Annual OE = 950,000 + 50,000t
For the new company, Te = 35%, after-tax MARR = 12% per year, and the depreciation method chosen for the $3,000,000 in capital investment is the 5-year MACRS alternative that allows straight line write-off with the half-year convention in years 1 and 6. Using a spreadsheet, estimate (a) the annual economic contribution of the project to the new corporation, and (b) the equivalent annual worth of these contributions. (c) At what after-tax MARR will the AW of contributions exceed $400,000 per year?
(a) Column L shows the EVA each year. Use Eq. [17.23} to calculate EVA.
(b) The AWEVA of $338,000 is calculated on the spreadsheet.
(c) Use Goal Seek to change cell A1 from 12% to 8.51% per year
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