$400,000 capital cost required for purchasing a machine (at time zero) that can

Question

$400,000 capital cost required for purchasing a machine (at time zero) that can generate revenue of $180,000 with operating cost of $35,000 for five years (from year 1 to year 5). The capital cost is depreciable over 6 years (from year 0 to year 5) based on MACRS 5-year life depreciation with the half year convention (table A-l at IRS). The salvage value will be zero and working capital $50,000. Please calculate NPV and ROR for this project considering the minimum rate of return 12% and 38% income tax.

Explanation / Answer

ROR is the rate at which the net present value of the cash flow is equal to the initial return. This can be calculated by the given formula:
0 = (investment) + CF1/ (1+ROR)^1+CF2/(1+ROR)^2+ .................... CFN/(1+ROR)^N

At ROR of 10.3 % our NPV is equal to initial return

Depreciation 400000 20.00%       80,000.00 400000 32.00%     128,000.00 400000 19.20%       76,800.00 400000 11.52%       46,080.00 400000 11.52%       46,080.00 400000 5.76%       23,040.00     400,000.00

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