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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.

7. If the firm used the DDB depreciation, NPW = ?

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

Solutions

Expert Solution

Answer :

(a).NPV calculation if following SLM depreciation

Income generated (per annum) = 100000

Less ; Depreciation ((300000 - 75000)/4) = 56250 p.a

Cash flow before tax = 43750

Tax @20% = 8750

Cash flow after tax = 35000

Add : Depreciation + cash from

Sale of machine = 75000 + 56250 = 131250

Net cash flow = 166250

PVAF @ 12% for 4 year = 3.037

Discounted cahs flow = 504904.25

Initial outflow = 300000

NPV = 204901.25

(b). NPV under DDB depreciation method (WDV method)

Depreciation calculatlion if depreciation rate is 50% per annum

Year Opening WDV Dereciation Closing WDV
1 300000 150000 150000
2 150000 75000 75000
3 75000 37500 37500
4 37500 37500 0

NPV Calcualtion

Particulars 1 2 3 4
Sales 100000 100000 100000 100000
Less : Depreciation 150000 75000 37500 37500
Cash flow before tax -50000 25000 62500 62500
Tax @20% -10000 5000 12500 12500
Cash flow after tax -40000 20000 50000 50000
Add : Depreciation + sales value of machine 150000 75000 37500 112500
Net cash flow 110000 95000 87500 162500
Df @12% .893 .797 .712 .636
Discounted cash flow 98230 75715 62300 103350

NPV = DCF -Intiatial outflow

= 339595 - 300000 = 39595

(c). NPV if Derpeciation method is MACRS

Depreciation calculation

Year Depreciation Rate Amount of depreciation
1 20% 60000
2 32% 96000
3 19.2% 57600
4 11.52% 34560

NPV Calculation

Particulars 1 2 3 4
Sales 100000 100000 100000 100000
Less : Depreciation 60000 96000 57600 34560
Cash flow before tax 40000 4000 42400 65440
Tax @20% 8000 800 8480 13088
Cash flow after tax 32000 3200 33920 52352
Add : Depreciation + sales value of machine 60000 96000 57600 109612
Net cash flow 92000 99200 91520 161912
Df @12% .893 .797 .712 .636
Discounted cash flow 82156 79062.4 65162.24 102976

NPV = 329356.64 - 300000 = 29356.64

ekkarill92 answered 1 year ago
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