Question
In: Economics
An auto supplier installed new equipment costing $1,050,000. The equipment generated new income averaging $275,000 per...
- An auto supplier installed new equipment costing $1,050,000. The equipment generated new income averaging $275,000 per year, and its operating costs averaged $50,000 per year. The equipment was depreciated using the MACRS method, assuming a 7-year recovery period and no salvage value. However, the equipment was kept in service for a total of 10 years, after which time a scrap dealer bought it for $75,000. The company has a combined effective federal and local tax rate of 26%, and uses an after-tax MARR rate of 8%. Determine the equipment’s after-tax net present worth over its 10-year service life.
[Answer: $302,000]
Solutions
Expert Solution
Using Excel
Tax rate = 26%
MACRS rate for 7 yrs property are 0.1429, 0.2449, 0.1749, 0.1249, 0.0893, 0.0892, 0.0893 & 0.0446
Depreciation = Purchase value * Depreciation rate
Net cash Flow = Annual revenue - annual O&M cost
Net cash flow will include depreciation recapture in EOY10
Taxable income = Net cash flow - Depreciation
Tax = Tax rate * Taxable income
ATCF = Taxable income - Tax + Depreciation
Using Excel
| Year | Initial cost | Revenue | O&M cost | Depreciation | Depreciation recapture | TI | Tax | ATCF |
| 0 | -1050000.00 | -1050000 | ||||||
| 1 | 275000.00 | -50000.00 | 150045.00 | 74955.00 | 19488.30 | 205512 | ||
| 2 | 275000.00 | -50000.00 | 257145.00 | -32145.00 | -8357.70 | 233358 | ||
| 3 | 275000.00 | -50000.00 | 183645.00 | 41355.00 | 10752.30 | 214248 | ||
| 4 | 275000.00 | -50000.00 | 131145.00 | 93855.00 | 24402.30 | 200598 | ||
| 5 | 275000.00 | -50000.00 | 93765.00 | 131235.00 | 34121.10 | 190879 | ||
| 6 | 275000.00 | -50000.00 | 93660.00 | 131340.00 | 34148.40 | 190852 | ||
| 7 | 275000.00 | -50000.00 | 93765.00 | 131235.00 | 34121.10 | 190879 | ||
| 8 | 275000.00 | -50000.00 | 46830.00 | 178170.00 | 46324.20 | 178676 | ||
| 9 | 275000.00 | -50000.00 | 225000.00 | 58500.00 | 166500 | |||
| 10 | 275000.00 | -50000.00 | 75000.00 | 300000.00 | 78000.00 | 222000 | ||
| NPW | 302084 |
NPW after tax = 302084 ~ 302000 (Nearest Thousand)
Showing formula in Excel
| Year | Initial cost | Revenue | O&M cost | Depreciation | Depreciation recapture | TI | Tax | ATCF |
| 0 | -1050000 | =B2 | ||||||
| 1 | 275000 | -50000 | =0.1429*1050000 | =C3+D3-E3+F3 | =G3*0.26 | =C3+D3-H3+F3 | ||
| 2 | 275000 | -50000 | =0.2449*1050000 | =C4+D4-E4+F4 | =G4*0.26 | =C4+D4-H4+F4 | ||
| 3 | 275000 | -50000 | =0.1749*1050000 | =C5+D5-E5+F5 | =G5*0.26 | =C5+D5-H5+F5 | ||
| 4 | 275000 | -50000 | =0.1249*1050000 | =C6+D6-E6+F6 | =G6*0.26 | =C6+D6-H6+F6 | ||
| 5 | 275000 | -50000 | =0.0893*1050000 | =C7+D7-E7+F7 | =G7*0.26 | =C7+D7-H7+F7 | ||
| 6 | 275000 | -50000 | =0.0892*1050000 | =C8+D8-E8+F8 | =G8*0.26 | =C8+D8-H8+F8 | ||
| 7 | 275000 | -50000 | =0.0893*1050000 | =C9+D9-E9+F9 | =G9*0.26 | =C9+D9-H9+F9 | ||
| 8 | 275000 | -50000 | =0.0446*1050000 | =C10+D10-E10+F10 | =G10*0.26 | =C10+D10-H10+F10 | ||
| 9 | 275000 | -50000 | =C11+D11-E11+F11 | =G11*0.26 | =C11+D11-H11+F11 | |||
| 10 | 275000 | -50000 | 75000 | =C12+D12-E12+F12 | =G12*0.26 | =C12+D12-H12+F12 | ||
| NPW | =NPV(8%,I3:I12)+I2 |
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