Question

You work for a very large engineering consulting firm. You have been asked to look at the viability of the company purchasing a private jet to fly staff to project sites around the world. A new Gulfstream G450 currently costs $40,000,000. Assume a 15-year service life, a salvage value of $24,000,000, annual costs of $2,500,000/year, and annual benefits of $3,500,000/year (time saved, increased business), a corporate tax rate of 40%, a CCA rate of 25%, and an after-tax MARR of 8% per year, compounded annually.

What is the after-tax net present value of this investment?

Answer 1

the company purchasing a private jet to fly staff to project sites around the world

* A new Gulfstream G450 currently costs $40,000,000

*Assume a 15-year service life,

* salvage value of $24,000,000,

*annual costs of $2,500,000/year

* annual benefits of $3,500,000/year

*corporate tax rate of 40%, a CCA rate of 25%

* after-tax MARR of 8% per year

What is the after-tax net present value of this investment?

Initial investment = 40,000,000

Depreciation expenses = dep. Base / useful life

Depreciation expenses = 40000000 / 15 = 2666666.67

Dep. Tax shield = dep. Exp. * CCA rate

Dep. Tax shield = 2666666.67 * 25% = 666666.67

**Annual Operating cash flow ( same as each years)

Annual operating cash flow

Items	amount
Annual benefits	3,500,000
- Annual cost	2,500,000
= Earning before tax	1000000
- tax exp @ 40%	400000
= earning after tax (excluding dep.)	600000
+ Dep. Tax shield	666666.67
= Annual operating cash flow	1266666

Terminal cash flow

Salvage value = 24000000

PV calculation

year	CF	PV factor @ 8% for $ 1	PV of cash flow
0th (initial) year	(40000000 )	(1/1+8%)0 = 0	(40000000 )
1 to 3 years cash flow	1266666	(1 /1+8%)15GT = 8.5594	10842000.52
Salvage value	24000000	(1 /1+8%)15 = 0.315242	7565808

NPV = PV of cash flow - initial investment

NPV = 10842000.52 + 7565808 - 40000000 = - $ 21592191.48

NPV (Net present value)

-$21592191

NPV is vegative, Not accept this projet.