Question

use excel and show functions

(12-33) Granny's pays a tax rate of 25%. Granny is considering the purchase of a new Turbo Churn for $25,000. The churn is a special handling device for food manufacture and has an estimated life of 4 years and a salvage value of $5,000. The new churn is expected to increase net income by $8000 per year for each of the 4 years of use. If Granny works with an after-tax MARR of 10%, should she buy the churn?

Answer 1

rate positively ..

	We have to compute the NPV of the project
	Annual depreciation = (25000-5000)/4				5000
	year	0	1	2	3	4
A	Initial investment	-25000
i	Saving		8000	8000	8000	8000
ii	Depreciation		5000	5000	5000	5000
iii=i-ii	Profit before tax		3000	3000	3000	3000
iv=iii*25%	Tax @ 25%		750	750	750	750
v=iii-iv	Profit after tax		2250	2250	2250	2250
B=v+ii	Cash flow		7250	7250	7250	7250
C	Salvage value after tax =					5000
D=A+B+C	Net cash flow	-25000	7250	7250	7250	12250
E	PVIF @ 10%	1	0.909091	0.826446	0.751315	0.683013
F=D*E	Present value=	(25,000.00)	6,590.91	5,991.74	5,447.03	8,366.91	1,396.59
	Therefore, NPV =	1,396.59