$400,000 capital cost required for purchasing a machine (at time zero) that can
ID: 2752083 • Letter: #
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-1 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 10% and 35% income tax.
Explanation / Answer
Depreciation as per Macrs Method
Depreciation for the first year = Cost x 1/ Useful life x A x Convention
= 400000 x 1/5 x 200% x 0.50
= $80000
Depreciation for the second year = [Cost - Depreciation charged in the previous years] x 1/ Recovery Period x A x Convention
= [400000 - 80000] x 1/4 x 200% x 1
= $160000
Depreciation for the third year = [Cost - Depreciation charged in the previous years] x 1/ Recovery Period x A x Convention
= [400000 - 240000] x 1/3 x 200% x 1
= $106667
Depreciation for the fourth year = [Cost - Depreciation charged in the previous years] x 1/ Recovery Period x A x Convention
= [400000 - 346667] x 1/ 2 x 200% x 1
= $53333
Depreciation for the fifth year = [Cost - Depreciation charged in the previous years] x 1/ Recovery Period x A x Convention
= [400000 - 400000] x 1/1 x 200% x 1
= $0
Tax Saving on Depreciation:
Year 1 = 80000 x 0.35 = $28000
Year 2 = 160000 x 0.35 = $56000
Year 3 = 106667 x 0.35 = $37333
Year 4 = 53333 x 0.35 = $18667
Cash flow after tax per year:
Present Value of Cash outflow = 400000 + 50000 = $450000
NPV = 411173 - 450000 = -$38827
Year Operating Cash flows after tax Tax Saving of cash flows Total Cash Inflows PVF 10% Present Value 1 94250 28000 122250 0.909 111125 2 94250 56000 150250 0.826 124107 3 94250 37333 131583 0.751 98819 4 94250 18667 112917 0.683 77122 411173Related Questions
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