1) You purchased a machine for $500,000 (installed), and you depreciated it using a 5 year...

1) You purchased a machine for $500,000 (installed), and you depreciated it using a 5 year MACRS. This machine generates $200,000 in annual revenue. In year 4, you sold the machine for $250,000. You received a loan for $400,000 on a 5 year loan at 5% (note, you must pay the remaining balance of this loan at the end of year 4 from the proceeds of the sale). In addition, you invested $80,000 in working capital initially. Your company is in a 35% tax bracket. What is your NPV(12%)?

Using the data from question #1, what is your IRR? Express the percentage as a whole number (i.e. 8.3% is entered as 8.3)

Assume that the data from problem #1 was all expressed in constant dollars and that the interest rate of 12% was an inflation free rate. if inflation is 3%, what is your market MARR? Express the percentage as a whole number (i.e. 8.3% is entered as 8.3)

Using the data from problem #1 and the Market MARR from problem 3 regenerate your cash flow analysis using Actual Dollars. In other words, inflate your revenue, salvage value, expenses and Working Capital accordingly. What is your Market NPW(rate from #3)?

Solutions

Expert Solution

Statement showing depreciation and book value of machine

Year	Opening balance	Depreciation rates	Depreciation	Closing rate
1	500000	20%	100000	400000
2	400000	32%	160000	240000
3	240000	19.20%	96000	144000
4	144000	11.52%	57600	86400
5	86400	11.52%	57600	28800
6	28800	5.76%	28800	0

Statement showing terminal cash flow

Particulars	Amount
Selling price of M/C	250000
BV	86400
Profit	163600
Tax @ 35%	57260
Cash inflow = selling price less tax	192740

Now let us calculate Instalment of loan

Installment = Loan/PVIFA(r%,n)

=400000/PVIFA(5%,5 years)

=400000/4.329477

=92389.92$

Table showing repayment schedule

Year	Opening balance	Installment	Int @ 5%	Principal	Closing balance
1	400000	92390	20000	72390	327610
2	327610	92390	16381	76009	251601
3	251601	92390	12580	79810	171791
4	171791	92390	8590	83800	87990
5	87990	92390	4400	87990	0

thus at end of year 4 there will be payment of 87990$

Statement showing NPV

Particulars	0	1	2	3	4	NPV
Cost of machine	-500000
Loan received	400000
WC required	-80000
Annual revenue		200000	200000	200000	200000
Depreciation		-100000	-160000	-96000	-57600
Interest		-20000	-16381	-12580	-8590
PBT		80000	23619	91420	133810
Tax @ 35%		28000	8266.8236	31996.99	46833.66
PAT		52000	15353	59423	86977
Add: depreciation		100000	160000	96000	57600
Cash flow after tax		152000	175353	155423	144577
Repayment of principal amount of loan		-72390	-76009	-79810	-83800
Repayment of remaining balance					-87990
Terminal cash flow from sale of machine					192740
WC release					80000
Total cash flow	-180000	79610	99343	75613	245526
PVIF @ 12%	1	0.8929	0.7972	0.7118	0.6355
Present value	-180000	71080.43	79195.83578	53819.91	156036.2	180132.4

IRR is rate at which NPV is 0, At 45.8215% NPV comes to 0

Particulars	0	1	2	3	4	NPV
Cost of machine	-500000
Loan received	400000
WC required	-80000
Annual revenue		200000	200000	200000	200000
Depreciation		-100000	-160000	-96000	-57600
Interest		-20000	-16381	-12580	-8590
PBT		80000	23619	91420	133810
Tax @ 35%		28000	8266.8236	31996.99	46833.66
PAT		52000	15353	59423	86977
Add: depreciation		100000	160000	96000	57600
Cash flow after tax		152000	175353	155423	144577
Repayment of principal amount of loan		-72390	-76009	-79810	-83800
Repayment of remaining balance					-87990
Terminal cash flow from sale of machine					192740
WC release					80000
Total cash flow	-180000	79610	99343	75613	245526
PVIF @ 45.8215%	1	0.68577	0.470280398	0.322504	0.221164
Present value	-180000	54594.2	46719.18619	24385.54	54301.43	0

Thus IRR = 45.8215%

If inflation was 3%

MARR = (1.12)/(1.03)-1

=1.087379-1

=8.7379%

Statement showing NPV

Particulars	0	1	2	3	4	NPV
Cost of machine	-515000
Loan received	412000
WC required	-82400
Annual revenue		206000	206000	206000	206000
Depreciation		-103000	-164800	-98880	-59328
Interest		-20600	-16872	-12957	-8847
PBT		84872	25058	96987	141960
Tax @ 35%		30596.36	9033.381352	34963.97	51176.41
PAT		55904	16505	63884	93507
Add: depreciation		106090	169744	101846.4	61107.84
Cash flow after tax		166854	191837	170702	159253
Repayment of principal amount of loan		-74562	-78290	-82204	-86314
Repayment of remaining balance					-90630
Terminal cash flow from sale of machine					198522.2
WC release					84872
Total cash flow	-185400	92292	113547	88498	265703
PVIF @ 8.7379%	1	0.919643	0.845742426	0.777781	0.71528
Present value	-185400	84875.75	96031.56435	68832.28	190051.8	254391

jeff jeffy answered 1 year ago

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