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

Tax rate = 25%

Depreciation = Purchase value * Depreciation rate

Taxable income = Net cash flow - Depreciation

Tax = Tax rate * Taxable income

ATCF = Taxable income - Tax + Depreciation

Using Excel

Year	Initial cost	Revenue	Depreciation	Salvage value	TI	Tax	ATCF
0	-150000.00						-150000.00
1		45000.00	49995.00		-4995.00	-1248.75	46248.75
2		45000.00	66675.00		-21675.00	-5418.75	50418.75
3		45000.00	22215.00		22785.00	5696.25	39303.75
4		45000.00	11115.00		33885.00	8471.25	36528.75
5		45000.00	0.00	30000.00	75000.00	18750.00	56250.00
						NPW	3034.60

NPW = 3034.60 ~ 3035

As NPW is positive, the project is profitable

Showing formula in excel

Year	Initial cost	Revenue	Depreciation	Salvage value	TI	Tax	ATCF
0	-150000						=B322
1		45000	=0.3333*150000		=C323-D323	=0.25*F323	=C323-G323
2		45000	=0.4445*150000		=C324-D324	=0.25*F324	=C324-G324
3		45000	=0.1481*150000		=C325-D325	=0.25*F325	=C325-G325
4		45000	=0.0741*150000		=C326-D326	=0.25*F326	=C326-G326
5		45000	0	30000	=C327-D327+E327	=0.25*F327	=F327-G327
						NPW	=NPV(15%,H323:H327)+H322