1) You purchased a machine for $500,000 (installed), and you depreciated it usin
ID: 2616658 • Letter: 1
Question
1) You purchased a machine for $500,000 (installed), and you depreciated it using a 5 year MACRS. This machine generates $200,000 in annual revenue. In year 4, you sold the machine for $250,000. You received a loan for $400,000 on a 5 year loan at 5% (note, you must pay the remaining balance of this loan at the end of year 4 from the proceeds of the sale). In addition, you invested $80,000 in working capital initially. Your company is in a 35% tax bracket. What is your NPV(12%)?
Using the data from question #1, what is your IRR? Express the percentage as a whole number (i.e. 8.3% is entered as 8.3)
Assume that the data from problem #1 was all expressed in constant dollars and that the interest rate of 12% was an inflation free rate. if inflation is 3%, what is your market MARR? Express the percentage as a whole number (i.e. 8.3% is entered as 8.3)
Using the data from problem #1 and the Market MARR from problem 3 regenerate your cash flow analysis using Actual Dollars. In other words, inflate your revenue, salvage value, expenses and Working Capital accordingly. What is your Market NPW(rate from #3)?
Explanation / Answer
Statement showing depreciation and book value of machine
Statement showing terminal cash flow
Now let us calculate Instalment of loan
Installment = Loan/PVIFA(r%,n)
=400000/PVIFA(5%,5 years)
=400000/4.329477
=92389.92$
Table showing repayment schedule
thus at end of year 4 there will be payment of 87990$
Statement showing NPV
IRR is rate at which NPV is 0, At 45.8215% NPV comes to 0
Thus IRR = 45.8215%
If inflation was 3%
MARR = (1.12)/(1.03)-1
=1.087379-1
=8.7379%
Statement showing NPV
Year Opening balance Depreciation rates Depreciation Closing rate 1 500000 20% 100000 400000 2 400000 32% 160000 240000 3 240000 19.20% 96000 144000 4 144000 11.52% 57600 86400 5 86400 11.52% 57600 28800 6 28800 5.76% 28800 0Related Questions
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