Question

The following information is for a proposed project that will provide the capability to produce a specialized product estimated to have a short market (sales) life before new technology, known to be in the R&D stage, makes it obsolete:

• Capital investment of $1,000,000, composed of $420,000 of depreciable equipment and $580,000 of non-depreciable capital (land, working capital, etc.)

• Assume that the depreciable property is in the MACRS (GDS) three-year property class.

• The study period is 3 years

• Annual operating and maintenance costs are $636,000 in the first year and increase at a rate of 6% per year.

• The estimated salvage value at the end of year 3 is $280,000

• The effective tax rate (combined federal and state) is 38%

• Assume that the recovered capital (salvage value – book value) is taxed at the same rate as taxable revenue

• After tax MARR is 10% Based on an after-tax analysis using net present value, what is the minimum amount of uniform annual revenue required to justify the project economically?

**

You might find it easier to track things if year 3 is divided
into a revenue column and a salvage value column and then add those together** Use of Excel is preferred.

Answer 1

For this we have to solve by trail and error, as shown below: the NPV is just positive with a revenue of 814,483

Year	0	1	2	3
Depreciable capital	-420000
Non-depreciable capital	-580000
Revenue		814483	814483	814483
Costs		-636000	-674160	-714610
Depreciation % MaACRS		33.33%	44.45%	14.81%
Depreciation		-139986	-186690	-62202
profit before tax		38497	-46367	37671.4
Taxes		-14628.9	17619.46	-14315.1
Net Income		53125.86	-63986.5	51986.53
Add back depreciation		139986	186690	62202
Return of non depreicable assets				580000
After tax salavge value				268173.6
Net Cash flow	-1000000	193111.9	122703.5	962362.2
NPV	$ 1.06

So, the minimum amount of uniform annual revenue required to justify the project economically is $814,483

The excel screen shot is as shown below: