A construction company decides to purchase a crane for $250,000. The crane quali

Question

A construction company decides to purchase a crane for $250,000. The crane qualifies as 5-year equipment for MACRS-GDS depreciation. The BTCF profile for the acquisition, expressed in constant dollars, consists of an annual uniform series of $50,000, plus a $50,000 salvage value at the end of the 7-year planning horizon. A 40% tax rate applies. Inflation is 4%/yr. The real ATMARR is 8%.

a) Determine the after-tax cash flows, in constant dollars, for each year.

b) Determine the present worth for the investment.

c) Determine the real internal rate of return for the investment.

Explanation / Answer

a)

b)

Present worth for the investment = -250000 + 50000/1.08 + 62000*1.08^2 + 49200/1.08^3 + 41520/1.08^4 +  41520/1.08^5  + 35760/1.08^6 + 60000/1.08^7

Present worth for the investment = $ 23,990.19

c)

Real IRR = irr(-250000, 48076.92, 57322.49 ,43738.62 ,35491.47 ,34126.41 ,28261.65 ,45595.07}

Real IRR = 4.40%

Year 0 1 2 3 4 5 6 7 Before Tax Cash Flow [a] 50000 50000 50000 50000 50000 50000 50000 Macrs Depreciation rate [b] 20% 32% 19.20% 11.52% 11.52% 5.76% Depreciation [c = 250000*b]          50,000          80,000          48,000          28,800          28,800          14,400 Salvage Value [d] 50000 After Tax Cash Flow (ATCF) [e = (a+d-c)*(1-tax rate) + c          50,000          62,000          49,200          41,520          41,520          35,760      60,000 Initial Investment [f] -250000 Cash Flow [g = e+f] -250000 50000 62000 49200 41520 41520 35760 60000

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