Question

You work for a very large engineering consulting firm. You have been asked to look at the viability of the company purchasing a private jet to fly staff to project sites around the world. A new Gulfstream G450 currently costs $40,000,000. Assume a 15-year service life, a salvage value of $24,000,000, annual costs of $2,500,000/year, and annual benefits of $3,500,000/year (time saved, increased business), a corporate tax rate of 40%, a CCA rate of 25%, and an after-tax MARR of 8% per year, compounded annually.

What is the after-tax net present value of this investment?

Answer 1

After tax net present value is -$24527900.

As it can be seen that after tax net net present value is -ve the proposal should not be accepted

Note.

After Tax net present value is PV of after tax inflow - total outflow.

PV factor = 1/(1+0.08)^n

where n stands for number of year.

CCA is deducted to calculate the income tax, however the same is non cash expenditure so the same is added back to after tax income.

Toal cost of jet - total CCA i.e $40,000,000 - $39,376,000 we get $624000 balance which is deducted from salvage value to get recapture amount

Recapture income = $24,000,000 - $624,000 we get $23,376,000.

Year 0 means as on period.