Question

10) You buy a machine now for $10,000. The machine can be depreciated using DDB depreciation with 5 years useful life and $2,000 salvage value. Three years later you sell the machine for $1,000. The annual net benefit is $8000. The inflation rate is 5% per year. The acceptable real after-tax rate of return after taking inflation into consideration is 10%. Combined incremental tax rate is 50%. Calculate PW of this investment a) $4102 b) $3654 c) $3181 d) $2706

Answer 1

Statement showing Present Worth Amount in Workings Particulars $ 10,000 Initial Investment $ 8,000 Annual net benefits $4,000 8000 X 0.5 Tax @ 50% $4,000 8000 X 0.5 Annual net benefits after tax $4,000 10000/5*2 $ 8,000 Depreciation PM Annual net benefits after tax before depreciation Present value of annuity factor @10% for 3 years 2.487 Annual net benefits after tax before depreciation @10% | $ 19,896 |8000 X 2.487 Present value of $1 after for 3 years @10% 0.751 3 vears after sales value 1000 $751 1000 X 0.751 Present value of terminal value $ 20,647 19896751 Total present value of inflows $ 10,000 less: intial outflows $ 10,647 20647 - 10000 Present worth Notes Under double declining method of depreciation solvage value is not considered for calculation of depreciation