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.

Answer 1

Solution :-

Book value of Device after 5 years = $150,000 * 5.76% = $8,640

Market Value of Device after five years = $30,000

Now Profit on Sale = $30,000 - $8,640 = $21,360

Tax on Profit = $21,360 * 0.25 = $5,340

Now After tax Salvage Value = $30,000 - $5,340 = $24,660

Accept the Project as Net Present Worth is Positive of the Project

As in case of NPV we accept the Project if NPV is greater than or equal to Zero.

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