Question

a. A $400,000 investment in a surface mount placement machine produces pre-tax revenue of $77640/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?  
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.

Answer 1

Solution A:

Tax rate	25%
	Annual
Increased revenue	77,640
Less: Depreciation as per table given below	30,000
Profit before tax	47,640
Tax	11,910
Profit After Tax	35,730
Add Depreciation	30,000
Cash Profit After tax	65,730
Cost of macine		400,000
Salvage valude		100,000
Depreciable amount		300,000
depreciation per year		30,000
WDV		100,000
Sale price		100,000
Profit/(Loss)		-
Tax		-
Sale price after tax		100,000
Calculation of NPV
					12.00%
Year	Captial		Operating cash	Annual Cash flow	PV factor	Present values
0	(400,000)			(400,000)	1.000	(400,000)
1			65,730	65,730	0.893	58,688
2			65,730	65,730	0.797	52,400
3			65,730	65,730	0.712	46,785
4			65,730	65,730	0.636	41,773
5			65,730	65,730	0.567	37,297
6			65,730	65,730	0.507	33,301
7			65,730	65,730	0.452	29,733
8			65,730	65,730	0.404	26,547
9			65,730	65,730	0.361	23,703
10	100,000		65,730	165,730	0.322	53,361
				Net Present Value		3,586

Solution B:

Tax rate	25%
	Annual
Increased revenue	77,640
Less: Depreciation as per table given below	30,000
Interest on bond (400000*6%)	24,000
Profit before tax	23,640
Tax	5,910
Profit After Tax	17,730
Add Depreciation	30,000
Cash Profit After tax	47,730
Cost of macine		400,000
Salvage valude		100,000
Depreciable amount		300,000
depreciation per year		30,000
WDV		100,000
Sale price		100,000
Profit/(Loss)		-
Tax		-
Sale price after tax		100,000
Calculation of NPV
					12.00%
Year	Captial		Operating cash	Annual Cash flow	PV factor	Present values
0				-	1.000	-
1			47,730	47,730	0.893	42,616
2			47,730	47,730	0.797	38,050
3			47,730	47,730	0.712	33,973
4			47,730	47,730	0.636	30,333
5			47,730	47,730	0.567	27,083
6			47,730	47,730	0.507	24,182
7			47,730	47,730	0.452	21,591
8			47,730	47,730	0.404	19,277
9			47,730	47,730	0.361	17,212
10	(400,000)		47,730	(352,270)	0.322	(113,422)
				Net Present Value		140,896