Your company purchased an airplane for $470,000 and will depreciate it using a 7-year MACRS with...

Your company purchased an airplane for $470,000 and will depreciate it using a 7-year MACRS with a 6-year life. Salvage value in year 6 is expected to be $160,000. The airplane is expected to increase company revenues by $179,000 per year. However, O&M costs are expected to be $20,000 per year. Your company is in the 21% tax bracket and the company's MARR is 15%. What is the Net Present Worth of this investment?

Expert Solution

	A	B	C	D=A-B-C	*E=D21%**	I	F=D-E+C+I	G	*FG**	Cost of asset		4,70,000
Year	Cash from Revenue in ($ Mn)	Cash Outflow (in $Mn)	Depreciation	Taxable Income	Tax @21%	Salvage Value net of tax	After tax CF	MARR @15%	PV	Year	Rate	Depreciation
Year 0		-4,70,000.00					-4,70,000.00	1.0000	-4,70,000.00	Year 1	14.29%	67,163.00
Year 1	1,79,000.00	20,000.00	67,163.00	91,837.00	19,285.77		1,39,714.23	0.8696	1,21,490.63	Year 2	24.49%	1,15,103.00
Year 2	1,79,000.00	20,000.00	1,15,103.00	43,897.00	9,218.37		1,49,781.63	0.7561	1,13,256.43	Year 3	17.49%	82,203.00
Year 3	1,79,000.00	20,000.00	82,203.00	76,797.00	16,127.37		1,42,872.63	0.6575	93,941.07	Year 4	12.49%	58,703.00
Year 4	1,79,000.00	20,000.00	58,703.00	1,00,297.00	21,062.37		1,37,937.63	0.5718	78,866.29	Year 5	8.93%	41,971.00
Year 5	1,79,000.00	20,000.00	41,971.00	1,17,029.00	24,576.09		1,34,423.91	0.4972	66,832.44	Year 6	8.92%	41,924.00
Year 6	1,79,000.00	20,000.00	41,924.00	1,17,076.00	24,585.96	1,39,615.93	2,74,029.97	0.4323	1,18,470.72	Depreciated Amount		4,07,067
							5,08,760.00	PW	1,22,857.59	Book Value (470000-407067)		62,933
										Salvage Value		1,60,000
										Capital Gain (160000-62933)		97,067
										Tax on Capital gain @21%*97067		20,384
		1								Salvage Value net of tax (160000-20384)		1,39,616
										It is assumed that company will pay tax at 21% on capital gains

Present Worth = Present Value of Cash Inflow - Present Value of cash Outflow.

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Rahul Sunny answered 9 months ago

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