"You purchased an airplane for $450,000 and will depreciate it using a 7-year MACRS with a...

"You purchased an airplane for $450,000 and will depreciate it using a 7-year MACRS with a 5-year life. Salvage value in year 5 is expected to be $176,000. The airplane is expected to increase revenues by $144,000 per year. However, O&M costs are expected to be $29,000 per year. Your company is in the 21% tax bracket and your MARR is 18%. What is the Net Present Worth of this investment?"

Expert Solution


Cashflows
		1	2	3	4	5
Incremental revenue		144000	144000	144000	144000	144000
Less: Incremental expensnes		29000	29000	29000	29000	29000
Less: Depreciation		64305	110205	78705	56205	40185
Before tax Income		50695	4795	36295	58795	74815
Less: tax @ 21%		10645.95	1006.95	7621.95	12346.95	15711.15
After tax income		40049.05	3788.05	28673.05	46448.05	59103.85

After tax salavge:
Book value at the end of 5th yr (450000*22.31%)				100395
Sale value of assets				176000
Gain on sale				75605
tax on sale				15877
Net after tax salvage				59728

NPV
	0	1	2	3	4	5
Investment	-450000
Annual cashflows		40049.05	3788.05	28673.05	46448.05	59103.85
After tax salvage						59728
Net cashflows	-450000	40049.05	3788.05	28673.05	46448.05	118831.9
PVF at 18%	1	0.847458	0.718184	0.608631	0.515789	0.437109
Present value of CF	-450000	33939.87	2720.519	17451.3	23957.39	51942.5
NPV	-319988

jeff jeffy answered 11 months ago

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