Question

Part A
A $400,000 investment in a surface mount placement machine produces pre-tax revenue of $55970/yr for 10 years, at which time the SMP machine has a salvage value of $100,000. Based on a 25% income tax rate, a 12% after tax MARR, & SLN depreciation, what will be the ATPW (After Tax Present Worth) of the investment? $  

Part B
Brian a Temple graduate suggests using a 6% bond issue to pay for the investment from the previous example. What will the ATPW be? $  (remember that a bond pays interest only each year and is repaid in full at the end of the term.

I made a typo in the income range. If your income is less than 54000 your tax liability will be negative. This will not change the solution, and it makes sense because a negative tax liability does increase income by lowering the taxes paid on other income.

Answer 1

Year	0	1	2	3	4	5	6	7	8	9	10
Initial investment	400000
Pre tax revenue		55,970	55,970	55,970	55,970	55,970	55,970	55,970	55,970	55,970	55,970
Depreciation		30,000.00	30,000.00	30,000.00	30,000.00	30,000.00	30,000.00	30,000.00	30,000.00	30,000.00	30,000.00	(400000-100000)/10
Salvage value											100000
Income before tax		25,970.00	25,970.00	25,970.00	25,970.00	25,970.00	25,970.00	25,970.00	25,970.00	25,970.00	125,970.00	Revenue-depreciation+salvage value for yr 10
Tax @ 25%		6,492.50	6,492.50	6,492.50	6,492.50	6,492.50	6,492.50	6,492.50	6,492.50	6,492.50	31,492.50
Income after tax		19,477.50	19,477.50	19,477.50	19,477.50	19,477.50	19,477.50	19,477.50	19,477.50	19,477.50	94,477.50	Income - tax
Net cash flow	-400,000	49,478	49,478	49,478	49,478	49,478	49,478	49,478	49,478	49,478	124,478	Adding back depreciation
MARR	12%
ATPW	-96,293.10	Using NPV formula with rate as 12% - initial investment
Part B
Bond int rate	6%
No of payments	10
Loan value	400000	Initial investment
ATPW	54,347	Using PMT formula with rate as 6% and 10 payments