Question

2) A project utilizing CNCs provides a revenue (income) of $20,000 increasing at $5,000 per year during a four (4)-year investment period. The machine to be used on the project is purchased for $20,000 and has an expected life of 4 years. he salvage value at the end of 4 years is $4,000. Out-of-pocket expenses are $10,000 for the first year and increases arithmetically at $1,000/yr thereafter, and depreciation deduction for income tax purposes are taken using a Years Digit Depreciation method. Compute the flow attractiveness of this project using the Method. Note that Befor Sum of the before tax cas Net Present Worth ow is Net Income-Expenses- Depreciation. You are not required, in the problem, to evaluate the after tax cash flow Rate of Return, nor the after-tax Present Value for the project, but be aware that tax consequences usually applies and the tax rate is 40% ? To evaluate the before tax project attractiveness, assume a minimum attractive rate of return (MARR) of 128. Granted this MARR, would you recommend the project on the before tax, as opposed to the after tax cash flow valuation basis After Depreci Taxable Taxes Net Yr Revenue Expenses Net Income Taxes IncomeB ation Income after Cash Taxes Flow Before Taxes

Answer 1

Year	Revenue	Expenses	Net Income before taxes	Depreciation	Taxable Income	Taxes	Net Income after Taxes	After taxes cash flow
1	$20000	$10000	$10000	$6400	$3600	$1440	$2160	$8560
2	$25000	$11000	$14000	$4800	$9200	$3680	$5520	$10320
3	$30000	$12000	$18000	$3200	$14800	$5920	$8880	$12080
4	$35000	$13000	$22000	$1600	$20400	$8160	$12240	$13840

Depreciation calculation:-

Formula = (Remaining useful life of asset / Sum of years digits)* Depreciable cost

Year	Beginning Book value	Depreciation percentage	Depreciation	Accumulated Depreciation	Ending Book value
1	$20000	40%	$6400	$6400	$13600
2	$13600	30%	$4800	$11200	$8800
3	$8800	20%	$3200	$14400	$5600
4	$5600	10%	$1600	$16000	$4000

After tax cash flow = Net income after taxes+Depreciation

Minimum attractive rate of return = 12%, So we discount the before tax cash flow at 12%

Year	Before tax cash flow	Present value factor at 12%	Present value
1	$10000	0.893	$8930
2	$14000	0.797	$11158
3	$18000	0.712	$12816
4	$22000	0.636	$13992
Total			$46896
Present value of salvage value (4000*0.636)			$2544
Total present value of cash inflow			$49440
Present value of cash outflow			$20000
Net present value			$29440

After Tax cash flow valuation

Year	After tax cash flow	Present value factor at 12%	Present value
1	$8560	0.893	$7644.08
2	$10320	0.797	$8225.04
3	$12080	0.712	$8600.96
4	$13840	0.636	$8802.24
Total			$33272.32
Present value of salvage value (4000-40%*4000)(0.636)			$1526.40
Total present value of cash inflow			$34798.72
Present value of cash outflow			$20000
Net present value			$14798.72

Before tax cash flow basis is recommended due to higher Net Present Value.