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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 (15 points). If the firm used the DDB depreciation, NPW =

8 (15 points). If the firm used the MACRS depreciation, NPW =

Solutions

Expert Solution

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 4year =3.037

Discounted cash flow =504901.25

Initial outflow =300000

NPV =204901.25

B.NPV under DDB depreciation method(WDV method)

Depreciation calculation If depreciation rate is 50% per annum

Year Opening WDV Depreciation closing WDV
1 300000 150000 150000
2 150000 75000 75000
3 75000 37500 37500
4 37500 37500 0

NPV calculation

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 vale 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-iniatial out flow

=339595-300000 =39595

C.NPV if Depreciation 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 vale 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

jeff jeffy answered 2 years ago
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