An asset in the five-years MACRS property class costs $150,000 and has a zero estimated salvage...

An asset in the five-years MACRS property class costs $150,000 and has a zero estimated salvage value after six years of use. The asset will generate annual revenues of $320,000 and will require $80,000 in annual labor costs and $50,000 in annual material expenses. Assume a tax rate of 21%. Compute the after-tax cash flows over the project life and the NPW for a MARR = 12%. Is the investment acceptable?

Expert Solution

MARR = 12%

Tax rate = 21%

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	O&M cost	Depreciation	Depreciation recapture	TI	Tax	ATCF
0	-150000.00							-150000
1		320000.00	-130000.00	30000.00		160000.00	33600.00	156400
2		320000.00	-130000.00	48000.00		142000.00	29820.00	160180
3		320000.00	-130000.00	28800.00		161200.00	33852.00	156148
4		320000.00	-130000.00	17280.00		172720.00	36271.20	153729
5		320000.00	-130000.00	17280.00		172720.00	36271.20	153729
6		320000.00	-130000.00	8640.00	0.00	181360.00	38085.60	151914
							NPW	490372

NPW = 490372

As NPW is positive, project should be selected

Showing formula in excel

Year	Initial cost	Revenue	O&M cost	Depreciation	Depreciation recapture	TI	Tax	ATCF
0	-150000							=B10
1		320000	=-80000-50000	=150000*0.2		=C11+D11-E11+F11	=G11*0.21	=C11+D11-H11+F11
2		320000	=-80000-50000	=150000*0.32		=C12+D12-E12+F12	=G12*0.21	=C12+D12-H12+F12
3		320000	=-80000-50000	=150000*0.192		=C13+D13-E13+F13	=G13*0.21	=C13+D13-H13+F13
4		320000	=-80000-50000	=150000*0.1152		=C14+D14-E14+F14	=G14*0.21	=C14+D14-H14+F14
5		320000	=-80000-50000	=150000*0.1152		=C15+D15-E15+F15	=G15*0.21	=C15+D15-H15+F15
6		320000	=-80000-50000	=150000*0.0576	0	=C16+D16-E16+F16	=G16*0.21	=C16+D16-H16+F16
							NPW	=NPV(12%,I11:I16)+I10

Rahul Sunny answered 6 months ago

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