Question

An investment of $1,000,000 generates annual net incomes of $400,000 and salvage value of $300,000 after 4 years. At MARR=10% and an effective tax rate of 30% use MACRS with the depreciation life of 3 years to determine after tax PW.

Answer 1

Tax rate = 30%

Depreciation = Purchase value * Depreciation rate

Taxable income = Net cash flow - Depreciation

Tax = Tax rate * Taxable income

ATCF = Taxable income - Tax + Depreciation

Salvage value will be recaptured depreciation after 4 yrs

Year	Untaxed BTCF	Taxed BTCF	MACRS Dep	Recaptured Dep	Tax income	Tax	ATCF
0	-1000000						-1000000
1		400000	333300.00		66700.00	20010.00	379990.00
2		400000	444500.00		-44500.00	-13350.00	413350.00
3		400000	148100.00		251900.00	75570.00	324430.00
4	300000	400000	74100.00	300000.00	625900.00	187770.00	512230.00
						NPW	2,80,666.07

NPW = 280666.07

As NPW is positive, project should be selected

Showing formula in excel

Year	Untaxed BTCF	Taxed BTCF	MACRS Dep	Recaptured Dep	Tax income	Tax	ATCF
0	-1000000						=B2
1		400000	=1000000*0.3333		=C3-D3	=F3*0.3	=C3-G3
2		400000	=1000000*0.4445		=C4-D4	=F4*0.3	=C4-G4
3		400000	=1000000*0.1481		=C5-D5	=F5*0.3	=C5-G5
4	300000	400000	=1000000*0.0741	=B6	=C6-D6+E6	=F6*0.3	=C6-G6+B6
						NPW	=NPV(10%,H3:H6)+H2