Question

Compute by hand (without EXEL!)

10.9 An asset in the five-year MACRS property class costs $150,000 and has a zero estimated salvage value after six years of use. The asset will generate annual revenues of $320,000 and will require $80,000 in annual labor and $50,000 in annual material expenses. There are no other revenues and expenses. Assume a tax rate of 40%. a. Compute the after-tax cash flows over the project life. b. Compute the NPW at MARR = 12%. Is the investment acceptable?

Answer 1

Year	0	1	2	3	4	5	6
cost of machine	-150000
Annual revenue		320000	320000	320000	320000	320000	320000
less annual material expense		80000	80000	80000	80000	80000	80000
less annual labor expenses		50000	50000	50000	50000	50000	50000
less annual depreciation		30000	48000	28800	17280	17280	8640
operating profit		160000	142000	161200	172720	172720	181360
less taxes-40%		64000	56800	64480	69088	69088	72544
after tax profit = operating profit*(1-tax rate)		96000	85200	96720	103632	103632	108816
add depreciation		30000	48000	28800	17280	17280	8640
after tax cash flow	-150000	126000	133200	125520	120912	120912	117456
present value factor = 1/(1+r)^n r = 12%	1	0.892857143	0.79719388	0.89285714	0.79719388	0.7117802	0.6355181
present value of cash flow = after tax cash flow*present value factor	-150000	112500	106186.224	112071.429	96390.3061	86062.773	74645.411
Net present value = sum of present value of cash flow	437856.14
Year	cost of equipment	MACRS rate		annual depreciation
1	150000	20%	150000*20%	30000
2	150000	32%	150000*32%	48000
3	150000	19.20%	150000*19.2%	28800
4	150000	11.52%	150000*11.52%	17280
5	150000	11.52%	150000*11.52%	17280
6	150000	5.76%	150000*5.76%	8640