Question

Consider a project with an initial investment of $60,000, a 6 year usefule life (and study period), and a $10,000 salvage value. You expect an annual net revenue of $15,000 (before tax), a MARR before tax of 15.3%, and an effective tax rate of 35%. The capital equipment is to be depreciated using MACRS GDS and a 3 year class life. Develop the after-tax cash flows and draw the cash flow diagram

Answer 1

Year	Particulars ( cash flows)	Cost	Depreciation (cost * depreciation rate)	profit before tax    ( income-dep. )	Tax (35%)	Net profit ( cash flow - tax)	Net Cash Flow ( Net profit after tax + depreciation)	Discounting factor (15.3%)	Discounting factor (15.3%)	Net Present value = NCF * DF
0	Initial cost	-60,000	-	-	-	-	-60,000	1/(1+15.3%)^0	1.00	$               -60,000.00
1	Sales	15,000	19,998	-4,998	-	-4,998	15,000	1/(1+15.3%)^1	0.87	$                  13,009.54
2	Sales	15,000	26,670	-11,670	-	-11,670	15,000	1/(1+15.3%)^2	0.75	$                  11,283.21
3	Sales	15,000	8,886	6,114	2,140	3,974	12,860	1/(1+15.3%)^3	0.65	$                    8,389.89
4	Sales	15,000	4,446	10,554	3,694	6,860	11,306	1/(1+15.3%)^4	0.57	$                    6,397.28
5	Sales	15,000	-	15,000	5,250	9,750	9,750	1/(1+15.3%)^5	0.49	$                    4,784.74
6	Sales	15,000	-	15,000	5,250	9,750	9,750	1/(1+15.3%)^6	0.43	$                    4,149.82
								NPV	NPV ( sum total)	$                -11,985.52

Here, depreciation is :

Depreciation schedule under MARCS for years
Recovery Year	3-Year
1	33.33
2	44.45
3	14.81
4	7.41

when a machine is depreciated under MARC, it doesn’t have a salvage value.