Question

A tractor for over-the-road hauling is to be purchased by AgriGrow for $90,000. It is expected to be of use to the company for 6 years, after which it will be salvaged for $4,000. Transportation cost savings are expected to be $170,000 per year; however, the cost of drivers is expected to be $70,000 per year, and operating expenses are expected to be $63,000 per year, including fuel, maintenance, insurance, and the like. The company’s marginal tax rate is 40 percent, and MARR is 10 percent on after-tax cash flows. Suppose that, to AgriGrow’s surprise, they actually dispose of the tractor at the end of the fourth tax year for $6,000. Develop tables using a spreadsheet to determine the ATCF for each year and the after-tax PW, AW, IRR, and ERR after only 4 years.

a) Use straight-line depreciation (no half-year convention) to find ATCF for each year (from End of Year 1 to 4), after-tax PW, AW, ERR, and IRR.

b) Use MACRS-GDS and state the appropriate property class to find ATCF for each year (from End of Year 1 to 4), after-tax PW, AW, ERR, and IRR.

c) Use double declining balance depreciation (no half-year convention, no switching) to find ATCF for each year (from End of Year 1 to 4), after-tax PW, AW, ERR, and IRR.

Answer 1

First we develop the below table which calculates the NPV and IRR using the straight line depreication.

Year	0	1	2	3	4
Purchase price	-90000
Savings		170000	170000	170000	170000
Costs		-70000	-70000	-70000	-70000
Operating expense		-63000	-63000	-63000	-63000
Depreication		-21500	-21500	-21500	-21500
Profit before tax		15500	15500	15500	15500
Taxes at 40%		-6200	-6200	-6200	-6200
Profit after tax		9300	9300	9300	9300
Add back depreciation		21500	21500	21500	21500
After tax disposal value					5200
After tax cash flow (ATCF)	-90000	30800	30800	30800	36000
NPV at 10%	$ 11,183.53
IRR	15.486%

After tax disposal value is calculated as = 6000-(6000-4000)*0.4 = 5,200

Depreciation = (90000-4000)/4 = 21,500 per tax year

NPV =$11,183.53

AW = NPV*r/(1-(1+r)^-n)) = 11,183.53*0.10/(1-(1.10)^-4)= 3,528.08

IRR /ERR = 15.49%

Note: We have answered one full question. Kindly note only one full question will be answered at a time. Kindly post the other two seperately for experts to answer.