Question

Assume that you will buy and operate a piece of equipment. The machine costs $25,000. You estimate that the equipment will generate $10,000 revenue, each year for six years. You also estimate that operating costs for the machine will be $4,500 each year for six years. These estimates are in constant 2019 dollars. The inflation rate for revenues is estimated to be 3.5%. The inflation rate for operating costs is estimated to be 5.0%.   You will depreciate the machine using the MACRS method, and the 5-year category. The marginal tax rate = 34%. The salvage value = 0.

1. Determine the after-tax cash flow, in actual $.
2. Determine the book value of the machine for each year
3. Determine the NPW of the actual-dollar, after-tax cash flow, if the MARR = 6%.

Year	Revenues Actual $	Operating Costs           Actual $	Before Tax Cash Flow Actual $	MACRS %	Depreciation Amount (dt)	Book Value	Taxable Cash Flow	Tax	After Tax Cash Flow Actual $
0	NA	NA		NA	NA		NA	NA
1
2
3
4
5
6

Answer 1

We will create a table here.

1st year
Revenue = 10000
BTCF = Revenue - Annual Operating Cost
10000 - 4500 = 5500
MACRS Depreciation % = 20%
25000 * 0.2 = 5000
Book Value = 25000 - 5000 = 20000
Taxable Cash Flow = 5500 - 5000 = 500
After Tax Cash Flow = 500 * (1 - 0.34) = 330
PW = 330 / (1.06^1) = 311.32

The values are calculated in the table.
Note that 2nd year taxable cash flow is negative so tax on that amount is not calculated.

Net Present Worth = 4017.06

Year	Revenue	AOC	BT Cash Flow	MACRS %	Depreciation	Book Value	Taxable	After Tax CF	PW @ 6%
0	-25000
1	10000	4500	5500.00	20%	5000	20000	500.00	330.00	311.32
2	10350.00	4725.00	5625.00	32%	8000	12000	-2375.00	-2375.00	-2113.74
3	10712.25	4961.25	5751.00	19.20%	4800	7200	951.00	627.66	527.00
4	11087.18	5209.31	5877.87	11.52%	2880	4320	2997.87	1978.59	1567.23
5	11475.23	5469.78	6005.45	11.52%	2880	1440	3125.45	2062.80	1541.44
6	11876.86	5743.27	6133.60	5.76%	1440	0	4693.60	3097.77	2183.81
								NPW	4017.06