Question

Two alternatives with the cash flow described below. MACRS depreciation and 5years MACRS

Incremental tax rate=24%

After tax MARR= 10%

	A	B
Initial cost	11,000	33,000
Uniform Annual Benefits	3,000	9,000
Salvage Value	2,000	5,000
Life(years)	5	5

Find the alternative to choiisw, after cinsidering taxes

Answer 1

Both the projects are giving positive NPV, but Project B is giving higher NPV.

Therefore Project B should be selected.

Note: It is assumed that the annual benefits are after depreciation expense.

Working:

Project A
Years	0	1-5	5
Initial cost	-11000
Annual benefits		3000
Salvage Value			2000
Income tax (24%)		-720	-480
Net income		2280	1520
Tax gain on depreciation *		432
Net cash flow	-11000	2712	1520
MARR	10%	10%	10%
PV factor	1	3.791	0.621
Present Value	-11000	10281	944
NPV	225
Cost	11000
Salvage value	2000
Depreciable value	9000
Life - Years	5
Annual Depreciation	1800
Tax rate	24%
Tax saving on depreciation *	432

Project B
Years	0	1-5	5
Initial cost	-33000
Annual benefits		9000
Salvage Value			5000
Income tax (24%)		-2160	-1200
Net income		6840	3800
Tax gain on depreciation *		1344
Net cash flow	-33000	8184	3800
MARR	10%	10%	10%
PV factor	1	3.791	0.621
Present Value	-33000	31026	2360
NPV	385
Cost	33000
Salvage value	5000
Depreciable value	28000
Life - Years	5
Annual Depreciation	5600
Tax rate	24%
Tax saving on depreciation *	1344