Question

1- A new generation Al machine (3-year MACRS asset) costs $750,000 and has a useful life of four years with a 3-year before-tax payback period, no salvage value. Assume uniform end-of-year benefits. Compute after-tax rate of return, based on MACRS depreciation and a 34% combined corporate income tax rate. (25 pts) $750,000 over 3 years

please solve without powerpoint + show me the steps.

Answer 1

1]	Before tax annual cash flows = 750000/3 =	$   2,50,000
2]		0	1	2	3	4
	Annual before tax cash flows		$    2,50,000	$     2,50,000	$    2,50,000	$    2,50,000
	-MACRS depreciation		$    2,49,975	$     3,33,375	$    1,11,075	$       55,575	$   7,50,000
	=NOI		$                25	$       -83,375	$    1,38,925	$    1,94,425
	-Tax at 34%		$                   9	$       -28,348	$        47,235	$       66,105
	=NOPAT		$                17	$       -55,028	$        91,691	$    1,28,321
	+Depreciation		$    2,49,975	$     3,33,375	$    1,11,075	$       55,575
	=OCF		$    2,49,992	$     2,78,348	$    2,02,766	$    1,83,896
	-Capital expenditure	$   7,50,000
	=FCF	$ -7,50,000	$    2,49,992	$     2,78,348	$    2,02,766	$    1,83,896
	After tax rate of return [IRR] is that discount rate for which NPV = 0.
	It has to be found out by trial and error by trying different discount rates to get to 0 NPV.
	Discounting with 10%:
	PVIF at 10%	1	0.90909	0.82645	0.75131	0.68301
	PV at 10%	$ -7,50,000	$    2,27,265	$     2,30,039	$    1,52,341	$    1,25,603
	NPV	$     -14,752
	Discounting with 9%:
	PVIF at 9%	1	0.91743	0.84168	0.77218	0.70843
	PV at 9%	$ -7,50,000	$    2,29,350	$     2,34,280	$    1,56,572	$    1,30,276
	NPV	$            478
	IRR lies between 9% and 10%. By simple interpolation = 9%+1%*478/(478+14752) =					9.03%