Homework Answers
For calculating present worth value of capital investment , we need to calculate tax saving on both deprectiaon and operating expenses on asset
Tax saving = Expense * depreciation rate
Present value of tax saving = tax saving * PVF (7%)
So i am providing the following table containg calculation of above then at final stage we need to deduct this present value of tax savings from price of capital asset and also add After tax sale value of sset at end of life
NEW BAGHOUSE
| Year | MACR (A) | Price(B) | Depreciation(A*B) | Tax rate | Tax saving on deprection | PVF(7%) | P.V. of tax asaving on dep. |
| 1 | 0.1429 | 1133500 | 1,61,977.15 | 0.22 | 35,634.97 | 0.9346 | 33,304.45 |
| 2 | 0.2449 | 1133500 | 2,77,594.15 | 0.22 | 61,070.71 | 0.8734 | 53,339.16 |
| 3 | 0.1749 | 1133500 | 1,98,249.15 | 0.22 | 43,614.81 | 0.8163 | 35,602.77 |
| 4 | 0.1249 | 1133500 | 1,41,574.15 | 0.22 | 31,146.31 | 0.7629 | 23,761.52 |
| 5 | 0.0893 | 1133500 | 1,01,221.55 | 0.22 | 22,268.74 | 0.7130 | 15,877.61 |
| 6 | 0.0892 | 1133500 | 1,01,108.20 | 0.22 | 22,243.80 | 0.6663 | 14,821.05 |
| 7 | 0.0893 | 1133500 | 1,01,221.55 | 0.22 | 22,268.74 | 0.6227 | 13,866.75 |
| 10,82,945.90 | Total | 1,90,573.30 |
Present worth or value of new baghouse = cost of asset - present value of tax saving on depreciation - present value of tax saving on operating expense + present value of net cash inflow at end of life from sale of asset
Present value of tax saving on operating expense = annual operating expense * depreciation rate *PVAF(7%,10 years) = 122,500 * 0.22 * 7.0236 = $189286.02
sale value of asset at end of life = 0.1424*1133500 = 161410.4
and book value = cost - total depreciation = 1133500-1082945.90 =50554.1
profit on sale = 161410.4-50554.1 = 110856.30
tax on profit = 110856.3* 0.22 = 24388.39
net cash flow from sale = 161410.4 - 24388.39 = $137022.01 and its presnent value = 137022.01 * 0.5083 = 69655.04
Present worth or value of new baghouse = 1133500 - 190573.3 - 189286.02 + 69655.04 = $8,23,295.72
NEW ESP
| Year | MACR (A) | Price(B) | Depreciation(A*B) | Tax rate | Tax saving on deprection | PVF(7%) | P.V. of tax asaving on dep. |
| 1 | 0.1429 | 987000 | 1,41,042.30 | 0.22 | 31,029.31 | 0.9346 | 28,999.99 |
| 2 | 0.2449 | 987000 | 2,41,716.30 | 0.22 | 53,177.59 | 0.8734 | 46,445.30 |
| 3 | 0.1749 | 987000 | 1,72,626.30 | 0.22 | 37,977.79 | 0.8163 | 31,001.27 |
| 4 | 0.1249 | 987000 | 1,23,276.30 | 0.22 | 27,120.79 | 0.7629 | 20,690.45 |
| 5 | 0.0893 | 987000 | 88,139.10 | 0.22 | 19,390.60 | 0.7130 | 13,825.50 |
| 6 | 0.0892 | 987000 | 88,040.40 | 0.22 | 19,368.89 | 0.6663 | 12,905.49 |
| 7 | 0.0893 | 987000 | 88,139.10 | 0.22 | 19,390.60 | 0.6227 | 12,074.53 |
| 9,42,979.80 | Total | 1,65,942.52 |
Present value of tax saving on operating expense = annual operating expense * depreciation rate *PVAF(7%,10 years) = 69,200 * 0.22 * 7.0236 = $106927.29
sale value of asset at end of life = 0.1424*987000 = 140548.8
and book value = cost - total depreciation = 987000 - 942979.8 =44020.20
profit on sale = 140548.8 - 44020.20 = 110856.30
tax on profit = 96528.60* 0.22 = 21236.29
net cash flow from sale = 140548.8 - 21236.29 = $119312.51 and its presnent value = $119312.51 * 0.5083 = 60652.43
Present worth or value of new ESP = 987000 - 165942.52 - 106927.29 + 60652.43 = $774,782.62
Therefore we should select New ESP as its present value of net cash outflow is lesser.
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