Homework Answers
Tax rate = 34%
Depreciation = Purchase value * Depreciation rate
Taxable income = Net cash flow - Depreciation
Tax = Tax rate * Taxable income
ATCF = BTCF - Tax
Salvage value at EOY 4 will be depreciation recapture as BV after 4 yrs = 0
Using Excel
NPW analysis for option 1
| Year | BTCF | MACRS Factor | Depreciation | Taxable income | Tax | ATCF |
| 0 | -100000.00 | -100000.00 | ||||
| 1 | 40000.00 | 0.3333 | 33330.00 | 6670.00 | 2267.80 | 37732.20 |
| 2 | 40000.00 | 0.4445 | 44450.00 | -4450.00 | -1513.00 | 41513.00 |
| 3 | 40000.00 | 0.1481 | 14810.00 | 25190.00 | 8564.60 | 31435.40 |
| 4 | 40000.00 | 0.0741 | 7410.00 | 32590.00 | 11080.60 | 45419.40 |
| 4 | 25000.00 | 25000.00 | 8500.00 | |||
| NPW | 23,250 |
NPW of option 1 = 23250
NPW analysis for option 2
| Year | BTCF | MACRS Factor | Depreciation | Taxable income | Tax | ATCF |
| 0 | -300000.00 | -300000.00 | ||||
| 1 | 100000.00 | 0.3333 | 99990.00 | 10.00 | 3.40 | 99996.60 |
| 2 | 100000.00 | 0.4445 | 133350.00 | -33350.00 | -11339.00 | 111339.00 |
| 3 | 100000.00 | 0.1481 | 44430.00 | 55570.00 | 18893.80 | 81106.20 |
| 4 | 100000.00 | 0.0741 | 22230.00 | 77770.00 | 26441.80 | 123058.20 |
| 4 | 75000.00 | 75000.00 | 25500.00 | |||
| NPW | 27,908 |
NPW of option 2 = 27908
As NPW of option 2 is more, it should be selected
Showing formula in excel for option 2, same can be used for option 1 by changing BTCF values
| Year | BTCF | MACRS Factor | Depreciation | Taxable income | Tax | ATCF |
| 0 | -300000 | =B61 | ||||
| 1 | 100000 | 0.3333 | =C62*-B$61 | =B62-D62 | =E62*0.34 | =B62-F62 |
| 2 | 100000 | 0.4445 | =C63*-B$61 | =B63-D63 | =E63*0.34 | =B63-F63 |
| 3 | 100000 | 0.1481 | =C64*-B$61 | =B64-D64 | =E64*0.34 | =B64-F64 |
| 4 | 100000 | 0.0741 | =C65*-B$61 | =B65-D65 | =E65*0.34 | =B65-F65+B66-F66 |
| 4 | 75000 | =B66-D66 | =E66*0.34 | |||
| NPW | =NPV(10%,G62:G66)+G61 |
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