Question
In: Accounting
A firm purchased some office equipment for a total cost of $300000. The equipment generated net...
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) of this investment. If the firm used the MACRS depreciation, NPW =
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Expert Solution
| Given | ||||||
| initial cost | $ 300,000 | Tax = 20% | ||||
| Salvage value | 0 | MARR = 12% | ||||
| Life | 4 years | |||||
| Depreciation applicable | MACRS 3 yrs | |||||
| Depreciation calculation | ||||||
| Year | Rate | x Cost | = Depreciation amount | |||
| 1 | 33.33% | x 300,000 | $ 99,990 | |||
| 2 | 44.45% | x 300,000 | $ 133,350 | |||
| 3 | 14.81% | x 300,000 | $ 44,430 | |||
| 4 | 7.41% | x 300,000 | $ 22,230 | |||
| Salvage value after tax | ||||||
| sale value | $ 75,000 | |||||
| Less: Tax at 20%(75000-0) x 20% | 15,000 | |||||
| Net salvage value | 60,000 | |||||
| OCF Calculation | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |
| Annual Income | $ 100,000 | $ 100,000 | $ 100,000 | $ 100,000 | ||
| Less: Depreciation | 99,990 | 133,350 | 44,430 | 22,230 | ||
| 10 | (33,350) | 55,570 | 77,770 | |||
| Less: Tax at 20% | 2 | -6670 | 11114 | 15554 | ||
| Net Income after tax | 8 | (26,680) | 44,456 | 62,216 | ||
| Add back : depreciation | 99,990 | 133,350 | 44,430 | 22,230 | ||
| OCF | 99,998 | 106,670 | 88,886 | 84,446 | ||
| Initial Capex | $ (300,000) | |||||
| Salvage value | $ 60,000 | |||||
| FCF | $ (300,000) | 99,998 | 106,670 | 88,886 | 144,446 | |
| DF at 12% | 1 | 0.892857143 | 0.797193878 | 0.711780248 | 0.63551808 | |
| Present Value | $ (300,000.00) | $ 89,283.93 | $ 85,036.67 | $ 63,267.30 | $ 91,798.04 | |
| NPV | $ 29,385.94 | |||||
| Note: Since question is silent about net income is after tax or before tax, so we have assumed that it is before tax and all the calculation is done accordingly. | ||||||
| DF = 1.12^-n, n = 0 to 4 | ||||||
| NPV = sum of all present values | ||||||
ekkarill92 answered 1 year agoRelated Solutions
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A firm purchased some office equipment for a total cost of $300000. The equipment generated net...
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) of this investment.
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A firm purchased some office equipment for a total cost of $300000. The equipment generated net...
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) of this investment
for problems 5-8.
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