Question

A company bought a new machine fot $300,000. The new machine generated revenue for $90,000 per year. Operating cost of that machine is $10,000 per year. The machine is depreciated according to 7-years MACRS method. The machine is sold for $80,000 in the middle of 6^th year of service. Determine the after tax net present worth. Assume, the after-tax MARR is 10% and income tax rate is 25% (federal and state combined).

Answer 1

Answer:

Year	0	1	2	3	4	5	6	Total
Revenues:
Annual revenue(in $)		90,000	90,000	90,000	90,000	90,000	45,000
Scrap value(in $)							80,000
Total Revenue		90,000	90,000	90,000	90,000	90,000	125,000
Expenses:
Initial investment(in $)	300,000
Annual Operating cost(in $)		10,000	10,000	10,000	10,000	10,000	5,000
Depreciation %		14.29	24.49	17.49	12.49	8.93	8.92
Depreciation value		300,000*14.29=42,870	73,470	52,470	37,470	26,790	26,760
Total expense	300,000	52,870	83,470	62,470	47,470	36,790	31,760
Profit before tax	-300,000	37,130	6,530	27,530	42,530	53,210	93,210
Tax @25%		9,282.5	1,632.5	6,882.5	10,632.5	13,302.5	23,302.5
Profit after tax	-300,000	27,847.5	4,897.5	20,647.5	31,897.5	39,907.5	69,907.5
Present Value at MARR 10%	-300,000	27847.5/1+0.1=25,316	4897.5/(1+0.1)2=4,047.5	20,647.5/(1+0.1)3=15,513	31,897.5/(1+0.1)4=21,786	39,907.5/(1+0.1)5=24,779	69,907.5/(1+0.1)6=39,461	-169,098

Net Pressent worth of the investment is -169,098.