Question

An investment of $600,000 is made in equipment that qualifies as 3-year equipment for MACRS-GDS depreciation. The before-tax cash flows, measured in constant dollars, for the investment consist of a uniform annual series of $200,000 plus a $200,000 salvage value at the end of the 5-year planning horizon. A 40% tax rate and 3% inflation rate apply. The real ATMARR is 10%

a. Determine the after-tax cash flows, in constant dollars, for each year.

b. Determine the present worth for the investment.

c. Determine the real internal rate of return for the investment.

Please show in Excel.

Answer 1

Working:
Real ATMARR	10%
Inflation rate	3%
Nominal rate
Formula	R=(1+R) x (1+i)-1
Where
R – Real interest rate
i – Inflation rate
Nominal rate	13.30%
Answer to Q. (a)
	Before-tax cash flows	Tax @ 40%	After-tax cash flows
Year-1	2,00,000	80,000	1,20,000
Year-2	2,00,000	80,000	1,20,000
Year-3	2,00,000	80,000	1,20,000
Year-4	2,00,000	80,000	1,20,000
Year-5	2,00,000	80,000	1,20,000
Year-5	2,00,000	80,000	1,20,000
			7,20,000
Answer to Q. (b)
	Before-tax cash flows	Tax @ 40%	After-tax cash flows	Interest Rate Factor	Present Value
Year-1	2,00,000	80,000	1,20,000	0.8826	1,05,914
Year-2	2,00,000	80,000	1,20,000	0.7790	93,481
Year-3	2,00,000	80,000	1,20,000	0.6876	82,507
Year-4	2,00,000	80,000	1,20,000	0.6068	72,822
Year-5	2,00,000	80,000	1,20,000	0.5356	64,273
Year-5	2,00,000	80,000	1,20,000	0.5356	64,273
					4,83,270
Answer to Q. (b)
	Before-tax cash flows	Tax @ 40%	After-tax cash flows	Interest Rate Factor	Present Value
Year-1	2,00,000	80,000	1,20,000	0.9091	1,09,091
Year-2	2,00,000	80,000	1,20,000	0.8264	99,174
Year-3	2,00,000	80,000	1,20,000	0.7513	90,158
Year-4	2,00,000	80,000	1,20,000	0.6830	81,962
Year-5	2,00,000	80,000	1,20,000	0.6209	74,511
Year-5	2,00,000	80,000	1,20,000	0.6209	74,511
					5,29,405