Question

A 5-year project requires a $300,000 investment in a machine that is expected to worth $50,000 when the project ends. Operating expenses are expected to be $75,000 in the first year and are expected to increase 3% per year over the life of the project. The appropriate discount rate is 8%, the company’s tax rate is 20%, and the CCA rate is 30%. What is the after-tax present value of the annual operating expenses? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit any commas and the $ sign in your response. For example, an answer of $1,000.50 should be entered as 1000.50.)

Answer 1

After-tax present value of annual operating expense = -181352.27

CALCULATIONS: -

years	1	2	3	4	5
operating expense (growth rate = 3%)	($75,000)	($77,250.00)	($79,567.50)	($81,954.53)	($84,413.16)
after tax operating expense (OE - 20%)	($60,000.0)	($61,800.0)	($63,654.0)	($65,563.6)	($67,530.5)
Depreciation ($300,000 / 5)	$60,000	$60,000	$60,000	$60,000	$60,000
Depreciation Tax shield $(60,000*30%)	$18,000.0	$18,000.0	$18,000.0	$18,000.0	$18,000.0
Total cash flow	($42,000.0)	($43,800.0)	($45,654.0)	($47,563.6)	($49,530.5)
Total cash flow	-$42,000.00	-$43,800.00	-$45,654.00	-$47,563.62	-$49,530.53
PV of $1 Factor for 8%	0.92592593	0.85733882	0.793832241	0.735029853	0.680583197
Discounted Cash Flow	-$38,888.89	-$37,551.44	-$36,241.62	-$34,960.68	-$33,709.65
After-tax present value of annual operating expense = -181352.27