Question

In the use of unmanned aerial vehicles (UAVs) that will shape the future of UAV applications, an online shopping company has purchased a group of UAVs for $84000. The market value is expected to decrease by $4000 per year. Also, the UAVs will be depreciated within 6 years. As cargo drones are a proven technology for the logistics industry, it is expected that the purchase of the group of UAVs will increase the company’s revenue by $16000 annually. Although, there is an expectation about the related operating expenses to be $42000 annually to operate fee-charging UAV services at certain times, the online shopping company’s effective income tax rate of is 40%, and its after-tax MARR is 15% per year. The company decides to use the cargo drones for 6 years to simplify the transportation of goods while offering faster, more environmentally friendly service than the alternative.

a) What would be the equivalent after-tax annual worth of this investment?

b) Is this investment profitable? Write your comments about your results.

Answer 1

(a)

Salvage value after 6 years = Cost - Decline in market value each year

= $84,000 - ($4000*6)

= $60,000

Year	0	1	2	3	4	5	6
Incremental Revenue		16,000	16,000	16,000	16,000	16,000	16,000
Operating Costs		(42,000)	(42,000)	(42,000)	(42,000)	(42,000)	(42,000)
Depreciation		(4,000)	(4,000)	(4,000)	(4,000)	(4,000)	(4,000)
Cash flows before tax (A)		(30,000)	(30,000)	(30,000)	(30,000)	(30,000)	(30,000)
Tax savings @ 40% (B)		12,000	12,000	12,000	12,000	12,000	12,000
Depreciation (C)		4,000	4,000	4,000	4,000	4,000	4,000
Operating cash flows (A)+(B)+(C)		(14,000)	(14,000)	(14,000)	(14,000)	(14,000)	(14,000)
Initial Investment	(84,000)
Salvage Value							60,000
Net Cash flows	(84,000)	(14,000)	(14,000)	(14,000)	(14,000)	(14,000)	46,000
PVF @ 15%	1.00	0.87	0.76	0.66	0.57	0.50	0.43
Net present worth	(84,000)	(12,174)	(10,586)	(9,205)	(8,005)	(6,960)	19,887

Total net present worth = Sum of present worth of all the years

= ($111,043)

Equivalent after-tax annual worth = Total after-tax net present worth / PVIFA (15%,6 years)

=($111,043) / 3.78

= ($29,349.61)

(b) Since the equivalent after-tax annual worth of the investment is negative, hence it is not a profitable investment.