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 DDB depreciation, NPW =
Solutions
Expert Solution
Step 1 :Calculation of Depreciation expense using DDB method
Depreciation rate= 2/ useful life
= 2/4
=.50 or 50%
| Year | Depreciation expense | Accumulated depreciation | Book value |
| 0 | 300000 | ||
| 1 | 300000*50%=150000 | 150000 | 300000-150000=150000 |
| 2 | 150000*50%=75000 | 150000+75000=225000 | 300000-225000=75000 |
| 3 | 75000*50%=37500 | 225000+37500= 262500 | 300000-262500= 37500 |
| 4 | 37500*50%= 18750 | 262500+18750= 281250 | 300000-281250= 18750 |
Step 2 :Calculation of After tax sale value :
Gain/(loss )on sale = sale value-book value at end of year4
= 75000-18750
= 56250
Tax on gain =56250*20%= 11250
After tax sale value =sale value-tax on gain
= 75000 -11250
= 63750
Step 3:calculation of annual cash flow ,Present value and NPV
| 0 | 1 | 2 | 3 | 4 | Total | |
| Initial cost | -300000 | |||||
| Net Income | 100000 | 100000 | 100000 | 100000 | ||
| Add:Depreciation | 150000 | 75000 | 37500 | 18750 | ||
| After tax sale value | 63750 | |||||
| Annual cash flowc[i] | -300000 | 250000 | 175000 | 137500 | 182500 | |
| present value factor @ 12% [ii] | 1 | .89286 | .79719 | .71178 | .63552 | |
| Present value of cash flow [i*ii] | -300000 | 223215 | 139508.25 | 97869.75 | 115982.4 | 276575.4 |
Net present worth = 276575.4 (rounded to276575.4)
##Find present value factor using the formula 1/(1+i)^n where i= 12% ,n= 1,2,3,4
ekkarill92 answered 2 years agoRelated Solutions
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