Question

A firm purchased some office equipment for a total cost of $300000. The equipment generated net income of $100000 per year. The firm’s marginal tax rate is 20%. The equipment was sold at the end of the 4th year for a total of $75000. Assume that MARR is 12%/year. Calculate the net present worth (NPW)

8. If the firm used the MACRS depreciation, NPW =

Answer 1

A firm purchased some office equipment for a total cost of $300000. The equipment generated net income of $100000 per year. The firm’s marginal tax rate is 20%. The equipment was sold at the end of the 4th year for a total of $75000. Assume that MARR is 12%/year.

Calculate the net present worth (NPW)

If the firm used the MACRS depreciation, NPW =  $ 29386

NPW = PV of Cash inflow - PV of cash outflow

>Initial investment = 300000

Cash flow statements

Years	0	1	2	3	4
Initial investment	(300000)
Annual net income		100000	100000	100000	100000
-Tax exp@20%		20000	20000	20000	20000
=Annual net income ( net of tax)		80000	80000	80000	80000
+ Depreciation tax shield (calculation is below)		19998	26670	8886	4446
= Operating cash flow		99998	106670	88886	84446
Net salvage value (calculation is below)					60000
Net cash flow	(300000)	99998	106670	88886	144446
PV of $1 factor @12% rate	1	0.893	0.7972	0.712	0.6355
PV of CF	(300000)	89283.91	85036.26	63,267.30	91798.32
NPW	$ 29386

Depreciation tax shield

Depreciation schedule under MACRS (assume 3 years class property )

Years and MACRS rate	1 = 33.33%	2 = 44.45%	3 = 14.81%	4 = 7.41%
Depreciation exp =cost * MACRS rate	99990	133350	44430	22230
Depreciation tax shield =depre. Exp. * tax rate	19998	26670	8886	4446

Net salvage value

Salvage value at end of 4 years = 75000 (inflow)

Book value at end of 4 years = 0 (fully depreciated)

Taxable gain = 75000

Tax expenses on gain = 75000 * 20% = 15000 (outflow)

Net salvage value = 75000 - 15000 = 60000