Problem

In 1991 a newly created division of Fantastic Mechanical Works Inc. (FMW) purchased a machine with a total initial cost of $180,000 and put it in service immediately. The estimated revenue from this machine for the first three years is $58,000 with a $22,000 associated cost.

For the next three years the net income from this machine will be $36,000. FMW has an effective income tax rate of 38% and uses a five-year life MACRS depreciation method. At the end of the sixth year, the machinery can be sold for $30,000. FMW is a profitable company and can apply tax losses from one division to tax payments of other divisions. FMW has MARR=10%. Calculate and plot the cash flow diagram for this project and calculate the before- and after-tax NPW. If you have a computer or a financial calculator, calculate the before- and after-tax rate of return as well.