Question

A manufacturer of fabricated metal products has acquired a new plasma table for $37,000. It is projected that the acquisition of this equipment will increase revenue by $10,000 per year. Operating costs for the machine will average $2,600 per year. The machine will be depreciated using the MACRS method, with a recovery period of 7 years. The company uses an after-tax MARR rate of 10% and has an effective tax rate of 30%.

What conclusion can be drawn by comparing the results of the before- and after-tax analyses?

Answer 1

Before tax analysis of the project:

Year	0	1	2	3	4	5	6	7
Revenue		$10,000	$10,000	$10,000	$10,000	$10,000	$10,000	$10,000
Operating costs		$2,600	$2,600	$2,600	$2,600	$2,600	$2,600	$2,600
Net cash flows	-$37,000	$7,400	$7,400	$7,400	$7,400	$7,400	$7,400	$7,400
Cost of capital	$1	$0.909	$0.826	$0.751	$0.683	$0.621	$0.564	$0.513
PV of cash flows	-$37,000	$6,727	$6,116	$5,560	$5,054	$4,595	$4,177	$3,797
NPV	-$974

After tax NPV analysis

Year	0	1	2	3	4	5	6	7
Revenue		$10,000	$10,000	$10,000	$10,000	$10,000	$10,000	$10,000
Operating costs		$2,600	$2,600	$2,600	$2,600	$2,600	$2,600	$2,600
Depreciation		$5,287	$9,061	$6,471	$4,621	$3,304	$3,300	$3,304
Operating income		$2,113	-$1,661	$929	$2,779	$4,096	$4,100	$4,096
Taxes		$634	-$498	$279	$834	$1,229	$1,230	$1,229
Net income		$1,479	-$1,163	$650	$1,945	$2,867	$2,870	$2,867
Net cash flows	-$37,000	$6,766	$7,898	$7,121	$6,566	$6,171	$6,170	$6,171
Cost of capital	$1	$0.909	$0.826	$0.751	$0.683	$0.621	$0.564	$0.513
PV of cash flows	-$37,000	$6,151	$6,528	$5,350	$4,485	$3,832	$3,483	$3,167
NPV	-$4,004

From the we see that the after tax NPV is less than the before tax NPV.