Question

1) A new washer costs $13,000. The old one is fully depreciated and can be sold for $4,000. The new washer will last 10 years and save $5,000 per year in expenses. The new washer will be depreciated on a straight line basis to zero. The tax rate is 26% and the required return is 15%. What is the NPV of this project? Answer to 2 decimals places, for example 543.12.

2) Two years ago, your firm bought a new machine for $5,000. The machine was depreciated on a MACRS 3 year schedule. Today, your company will sell the machine for $4,000. The tax rate is 24%. What are the after tax proceeds from the sale? Answer to 2 decimals, for example 105.21.

MACRS 3 Year
Year	Amount
1	33.33%
2	44.45%
3	14.81%
4	7.41%

Answer 1

1) Initial investment = Cost of new washer - after tax salvage value of old washer

or, Initial investment = $13000 - [ $4000 x (1 - 0.26) ] = $10,040

Depreciation per year on the new washer = $13000 / 10 = $1300

Annual cash inflow = Savings in expenses net of tax + Depreciation tax shield = [ $5000 x (1 - 0.26) ] + $1300 x 26% = $4038

NPV = (-)Initial investment + Annual cash inflow x PVIFA (15%, 10) = (-)$10,040 + $4038 x 5.01876862567 = $10,225.7877 or $10,225.79

Note : where, r is the interest rate, i.e., 15% or 0.15 and n is the no. of years, i.e., 10.

2) Current book value of machine = Cost of machine - Depreciation for two years

or, Current book value of machine = $5000 - [ $5000 x (33.33% + 44.45%) ] = $1,111

Tax on gain on sale = (Sale price - Book value) x tax rate = ($4000 - $1111) x 24% = $693.36

After tax proceeds from sale = Sale price - tax on gain on sale = $4000 - $693.36 = $3,306.64