Question

Part A A $400,000 investment in a surface mount placement machine produces pre-tax revenue of $58530/yr for 10 years, at which time the SMP machine has a salvage value of $100,000. Based on a 25% income tax rate, a 12% after tax MARR, & SLN depreciation, what will be the ATPW (After Tax Present Worth) of the investment? $ _____ Part B Brian a Temple graduate suggests using a 6% bond issue to pay for the investment from the previous example. What will the ATPW be? $ _____ (remember that a bond pays interest only each year and is repaid in full at the end of the term.

***** If your income is less than 54000 your tax liability will be negative. This will not change the solution, and it makes sense because a negative tax liability does increase income by lowering the taxes paid on other income.

Answer 1

Have a look at the following table and calculations

Case 1 : MARR of 12%

Case 2: MARR of 6%

0 4.50% Year 4 10 Initial Investment 4 Post tax revenues Tax benefit of depreciation Post tax salvage value 43897.5 43897.5 43897.5 43897.5 43897.5 43897.5 43897.5 43897.5 43897.5 43897.5 7500 7500 7500 7500 7500 500 7500 7500 7500 7500 100000 Free cash Flows Discount Factor Present values ATPW 400000 51397.5 51397.5 51397.5 51397.5 51397.5 51397.5 51397.5 51397.5 51397.5 151397.5 10 1 0.956938 0.91573 0.876297 0.838561 0.802451 0.767896 0.734828 0.703185 0.672904 0.643928 -400000 49184.21 47066.23 45039.45 43099.96 41243.98 39467.92 37768.35 36141.96 34585.61 97489.04 71086.7 12 13 15

006 0.75 Initial Investment -58530 0.75 (SC$3-100000)/10)*0.25SC$3-100000/10) 0.25SC3-100000)/10) 0.25 -SC$3-100000)/10)*0.25-C$3-100000/10)*0.25 C$3-100000) -58530 0.75 -58530 0.75 -58530 0.75 -58530 0.75 -58530 0.75 Post tax revenues Tax benefit of depreciation Post tax salvage value -SUMIG3:G3) Free cash Flows Discount Factor Present values ATPW SUM C3:C8) -SUMID3 08) -SUM E3:E8) SUM F3:F8) -SUM H3:H8 -SUM I3:18) 10 -09 C10 SUMIC11:M11) 09 D10 -E9 E10 -F9 F10 -G9 G10 xH9" Н 10 19*110 12 13 14 15 17 18 19 20