Question

AgriGrow is to purchase a tractor for over-the-road hauling for $90,000. It is expected to be of use to the company for 6 years, after which it will be salvaged for $4,000. Transportation cost savings are expected to be $170,000 per year; however, the cost of drivers is expected to be $70,000 per year, and operating expenses are expected to be $63,000 per year, including fuel, maintenance, insurance, and the like. The company's marginal tax rate is 40 percent, and MARR is 10 percent on after-tax cash flows. Suppose that, to AgriGrow's surprise, they actually dispose of the tractor at the end of the fourth tax year for $6,000. Develop tables using a spreadsheet to determine the ATCF for each year and the after-tax PW, AW, IRR, and ERR after only 4 years.

Answer 1

I have solved it using excel refer the picture below

fx =MIRR( U10:U14 ,10%,10%) V W 10 11 12 13 EoY ATCE 0 -90000 1 34200 30200 27533.33 36466.67 After Tax PW | $11,643.01 After Tax AW $3,673.03 After Tax IRO 15.836% After Tax ERNY 13.397% 14 4. 15 16 17 18

Manually we can derive it as follows

First of all convert the cash outflow into present value

Present value of outflow = $ 90,000

Now convert inflow into future value

FV = 34,200*1.1^3 + 30,200*1.1^2 + 27,533.33*1.1 + 36,466.67 = $ 148,815.63

Now equate these two values in the following manner

90,000(1+ ERR)4 = 148,815.63

(1 + ERR)4 = 148,815.63 90.000

(1 + ERR)* = 1.653505

ERR = 1.6535057 – 1

ERR = 1.133969 - 1

ERR = 0.133969

ERR = 13.397%