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) of this investment. If the firm used the MACRS depreciation, NPW =

Answer 1

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