Petroleum Exploration and Refining Services is trying to decide the After Tax me

Question

Petroleum Exploration and Refining Services is trying to decide the After Tax merits of two competing investments. The choices are A fleet of general purpose heavy trucks. Initial Investment 400,000 Salvage Value after 10 years is 40,000. Before Tax Revenue above Expenses is 90,000/yr. For each of the 10 years. Petroleum Production Equipment. Initial Cost 500,000. Salvage Value after 20 years is 20.000. Before Tax Revenue over Expenses are 120,000/yr. over the entire 20 year period. The company mandates that you compare the two choices for the first 6 years and decide on the Present Worth over the first 6 years. Use MACRS (government mandated) depreciation. Income Tax Rate is 40%. Interest rate I = 6%, Use PW of the After Tax Cash Flow as the criterion, but show for each year the depreciation. Taxable Income, Taxes, and After Tax Cash Flow.

Explanation / Answer

value ofasset MACRS dep rate Depreciation Years cash inflow before tax depreciation after depreciation cash flow Tax 40% cash flow after tax dep cash flow after tax before dep present value @6% present value of cash inflow 400000 10 40000 0 400000 tax 400000 18% 72000 1 90000 40000 50000 20000 30000 40000 70000 0.943396 66037.74 400000 14.40% 57600 2 90000 72000 18000 7200 10800 72000 82800 0.889996 73691.71 400000 11.52% 46080 3 90000 57600 32400 12960 19440 57600 77040 0.839619 64684.27 400000 9.22% 36880 4 90000 46080 43920 17568 26352 46080 72432 0.792094 57372.93 400000 7.37% 29480 5 90000 36880 53120 21248 31872 36880 68752 0.747258 51375.49 6 90000 29480 60520 24208 36312 29480 65792 0.704961 46380.76 present worth after 6 years 359542.9 cash outflow 400000 present worth after 6 years -40457.1 value ofasset MACRS dep rate Depreciation Years cash inflow before tax depreciation after depreciation cash flow Tax 40% cash flow after tax dep cash flow after tax before dep present value @6% present value of cash inflow 500000 3.75% 18750 0 500000 tax 500000 7% 36095 1 120000 18750 101250 40500 60750 18750 79500 0.943396 75000 500000 6.68% 33385 2 120000 36095 83905 33562 50343 36095 86438 0.889996 76929.51 500000 6.18% 30885 3 120000 33385 86615 34646 51969 33385 85354 0.839619 71664.86 500000 5.71% 28565 4 120000 30885 89115 35646 53469 30885 84354 0.792094 66816.27 500000 5.29% 26425 5 120000 28565 91435 36574 54861 28565 83426 0.747258 62340.76 6 120000 26425 93575 37430 56145 26425 82570 0.704961 58208.59 present worth after 6 years 410960 cash outflow 500000 present worth after 6 years -89040 option 1 should be choosens

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