Question

"You are considering the purchase of a new machine for a project. Details of this potential purchase are provided below.
-The project life is 3 years.
The machine costs $210,000.
* You will pay cash for half of this machine immediately, and will borrow the remaining half at 9.4% annual rate compounded annually over 3 years.
* The machine will be depreciated using a seven year MACRS approach.
Annual O&M costs (expenses) of the machine are $25,000.
Annual labor savings (revenues) are $144,000.
Salvage value at the end of year 3 will be $72,000.
Working capital requirement is initially $25,000. Any investment in working capital will be recovered at the end of the project.
Assume an income tax rate and gains tax rate of 34%.
Find the NPW of this project based on a MARR of 16%."

Answer 1

Calculation of MACRS Depreciation
Cost	Rate	Depn	Year
2,10,000.00	14.29%	$30,009.00	1
2,10,000.00	24.49%	$51,429.00	2
2,10,000.00	17.49%	$36,729.00	3
2,10,000.00	12.49%	$26,229.00	4
2,10,000.00	8.93%	$18,753.00	5
2,10,000.00	8.92%	$18,732.00	6
2,10,000.00	8.93%	$18,753.00	7
2,10,000.00	4.46%	$9,366.00
Salvage value for tax purposes (after 3 years)		$91,833.00
Calculation of Interest (assume principal repayment is bullet after 3 years)
50% of machine cost	$1,05,000.00
Borrowing cost	9.40%
Interest per annum	$9,870.00
Calculation of Capital gain/loss at the end of 3 years
Salvage value	$72,000.00
Salvage value for tax purposes	$91,833.00
Hence capital loss for tax purposes	-$19,833.00
Calculation of profit after tax	Year 1	Year 2	Year 3
Labor savings	$1,44,000.00	$1,44,000.00	$1,44,000.00
Less : cost	$25,000.00	$25,000.00	$25,000.00
Less: Interest	$9,870.00	$9,870.00	$9,870.00
Less: Tax Depreciation	$30,009.00	$51,429.00	$36,729.00
Less: Capital loss			$19,833.00
Profit before tax	$79,121.00	$57,701.00	$52,568.00
Tax	$26,901.14	$19,618.34	$17,873.12
Profit After Tax	$52,219.86	$38,082.66	$34,694.88
Calculation of NPV	Year 1	Year 2	Year 3
Cost of Machine	-$2,10,000.00
Debt	$1,05,000.00
Repayment of Debt			-$1,05,000.00
Sale of Machine			$72,000.00
Working Capital	-$25,000.00
Recoup of working capital			$25,000.00
Profit after tax as per above calculations	$52,219.86	$38,082.66	$34,694.88
Add: Tax depreciation (since non cash)	$30,009.00	$51,429.00	$36,729.00
Net cash flow	-$47,771.14	$89,511.66	$63,423.88
MARR	16%
Net Present value	$65,972.72