Question

Equipment costing $100,000 was sold in the middle of the 4th year for a MV of $20,000.

Tax rate : 40%.

Annual revenues : $55,000 per year

Annual expenses : $5,000 per year.

Using only the GDS method, populate a table with the NIAT and ATCF. Show all formulas and calculations.

Using an after tax MARR of 18%, show if this project is profitable.

The equipment is depreciated using 5-yr MACRS depreciation factors.

Answer 1

year	Revenue	expenses	BTCF	depreciation	Taxable income	Tax (40%)	NIAT	ATCF
0			-100000					-100000
1	55000	5000	50000	20000 (100000*20%)	30000	12000	18000	38000
2	55000	5000	50000	32000 (100000*32%)	18000	7200	10800	42800
3	55000	5000	50000	19200 (100000*19.20%)	30800	12320	18480	37680
4	55000	5000	50000	11520 (100000*11.52%)	38480	15392	23088	34608
4			20000					20000

Tax = taxable income *40%

NIAT = taxable income – tax

ATCF = NIAT + depreciation

year	ATCF	PV factor (18%)	Present value of cash flows
0	-100000	1	-100000
1	38000	0.84746	32203.48
2	42800	0.71818	30738.10
3	37680	0.60863	22933.18
4	34608	0.51579	17850.46
4	20000	0.51579	10315.80
Net present value			14041.20

PV factor using present value factor of $1 @ 18% table

As the NPV of the project is positive, the project is profitable