Question

A company is considering the purchase of an industrial laser for $150,000. The device has a useful life of five years and a salvage (market) value of $30,000 at the end of those five years. The before-tax cash flow is estimated to be $45,000 per year. The laser would be depreciated using MACRS with a recovery period of three years. If the effective income tax is 25% and the after-tax MARR is 15%, use the PW method on an after-tax basis to determine the profitability of the laser and make a recommendation.

Be sure to explain any extraordinary calculations (such as the computation of taxable income related to the sale of the laser after five years) as well as the reasoning for your recommendation.

Answer 1

Answer:

As per the data given as under:
Initial cost = $150000
Salvage = $30000
MARR =15%
Income Tax = 25% or 0.25
Depreciation = Purchase value * Depreciation rate
Taxable income = Net cash flow - Depreciation
Tax = Tax rate * Taxable income
ATCF = Taxable income - Tax + Depreciation

The calculations are shown in the excel sheet as under:

Workings:

Thus, as per the above calculations NPW = 3035. As the NPW is positive, the project is profitable, Hence it is recommended.