Question

assume a 21% tax rate

(12-14) A construction equipment rental company can purchase a new crane for $1,125,000 which is expected to last for 25 years. The expected salvage value at that time is $147,000. The annual rental income from the crane is $195,000. Using straight-line depreciation and a MARR of 15%, a) What is the present worth of the after-tax cash flow for this equipment? b) Should the company invest in this crane?

Answer 1

Solution a:

Annual depreciation = ($1,125,000 - $147,000) /25 = $39,120

Annual net income = ($195,000 - $39,120) * (1-0.21) = $123,145

Annual cash inflows = Net income +Depreciation = $123,145 + $39,120 = $162,265

Present worth of after tax cash flow = $162,265 * Cumulative PV factor at 15% for 25 periods + $147,000 * PV factor at 15% for 25th period

= $162,265 * 6.46415 + $147,000* 0.03038

= $1,048,905 + $4,466 = $1,053,371

Solution b:

As present worth is lesser than initial investment, therefore company should not invest in crane.