Question

1. A project will require the investment of $108,000 in equipment (straight line depreciation with a depreciable life of 10 years and zero salvage value). The annual project income after all expenses except depreciation have been paid is projected to be $24,000. Assume a 34% income tax rate for this corporation. The corporation wants a 15% after-tax rate of return on its investments after 10 years. Determine by present worth analysis whether this project should be undertaken.

Answer 1

Initial Investment = 108000

Depreciation each year = 108000/10 = 10800

Salvage value = 0

Tax =34% applicable only on (Net Cash flow before depreciation and tax - depreciation)

Final net cash flow each year = Cash inflow after tax + Depreciation

using excel

Year	Depreciation	Net Cash Flow bef Depreciation and Tax	Tax Rate	Net annual after depreciation and tax	Net annual cash Flow	Discount Factor @ 15%	Present Value of Net annual cash flow
1	10,800.00	24,000.00	34%	8712	19,512.00	0.869565	16,966.96
2	10,800.00	24,000.00	34%	8712	19,512.00	0.756144	14,753.88
3	10,800.00	24,000.00	34%	8712	19,512.00	0.657516	12,829.46
4	10,800.00	24,000.00	34%	8712	19,512.00	0.571753	11,156.05
5	10,800.00	24,000.00	34%	8712	19,512.00	0.497177	9,700.91
6	10,800.00	24,000.00	34%	8712	19,512.00	0.432328	8,435.58
7	10,800.00	24,000.00	34%	8712	19,512.00	0.375937	7,335.28
8	10,800.00	24,000.00	34%	8712	19,512.00	0.326902	6,378.51
9	10,800.00	24,000.00	34%	8712	19,512.00	0.284262	5,546.53
10	10,800.00	24,000.00	34%	8712	19,512.00	0.247185	4,823.07
							97,926.21

showing formula in excel

Year	Depreciation	Net Cash Flow bef Depreciation and Tax	Tax Rate	Net annual after depreciation and tax	Net annual cash Flow	Discount Factor @ 15%	Present Value of Net annual cash flow
1	=108000/10	24000	0.34	=(C2-B2)*(1-D2)	=E2+B2	=1/1.15^A2	=G2*F2
2	=108000/10	24000	0.34	=(C3-B3)*(1-D3)	=E3+B3	=1/1.15^A3	=G3*F3
3	=108000/10	24000	0.34	=(C4-B4)*(1-D4)	=E4+B4	=1/1.15^A4	=G4*F4
4	=108000/10	24000	0.34	=(C5-B5)*(1-D5)	=E5+B5	=1/1.15^A5	=G5*F5
5	=108000/10	24000	0.34	=(C6-B6)*(1-D6)	=E6+B6	=1/1.15^A6	=G6*F6
6	=108000/10	24000	0.34	=(C7-B7)*(1-D7)	=E7+B7	=1/1.15^A7	=G7*F7
7	=108000/10	24000	0.34	=(C8-B8)*(1-D8)	=E8+B8	=1/1.15^A8	=G8*F8
8	=108000/10	24000	0.34	=(C9-B9)*(1-D9)	=E9+B9	=1/1.15^A9	=G9*F9
9	=108000/10	24000	0.34	=(C10-B10)*(1-D10)	=E10+B10	=1/1.15^A10	=G10*F10
10	=108000/10	24000	0.34	=(C11-B11)*(1-D11)	=E11+B11	=1/1.15^A11	=G11*F11
							=SUM(H2:H11)

Net Present value = -108000+97926.21 = - 10073.79

As present worth is -ve therefore project should not be undertaken