This question is similar to question 2 but annual revenue is given and sale valu

Question

This question is similar to question 2 but annual revenue is given and sale value is unknown: Suppose you have to decide whether sell an old machine or keep it with a major overhaul. You can: A) Sell the machine at time zero for X dollars with zero book value and paying the tax of 40%.

B) Keep the machine, which requires a major overhaul cost of $1,000,000 at time zero. The overhaul cost is depreciable from time 0 to year 5 (over six years) based on MACRS 5-year life depreciation with the half year convention (table A-1 at IRS). In this case machine can produce and generate equal annual revenue of 900,000 dollars for five years (year 1 to 5) and salvage value of the machine will be $250,000 with zero book value at the end of year 5. The operating cost of the machine will be $400,000 per year from year 1 to year 5.

Calculate the sale value, X, that can break-even the NPV of keeping the machine. Consider 40% income tax rate and after-tax minimum ROR of 16%.

Explanation / Answer

Depreciation 1000000 20% 200000 1000000 32% 320000 1000000 19.20% 192000 1000000 11.52% 115200 1000000 11.52% 115200 Cash Flow Year 1 2 3 4 5 5 Revenue 900000 900000 900000 900000 900000 250000 salvage value Cost 400000 400000 400000 400000 400000 57600 remaining value Depreciation 200000 320000 192000 115200 115200 Net Revenue 300000 180000 308000 384800 384800 192400 Less: Tax @ 40% 120000 72000 123200 153920 153920 76960 Revenue after tax 180000 108000 184800 230880 230880 Add back depreciation 200000 320000 192000 115200 115200 OCF 380000 428000 376800 346080 346080 115440 Year 0 $    -1,000,000 1 $         380,000 2 $         428,000 3 $         376,800 4 $         346,080 5 $         346,080 5 $         115,440 NPV(16%,B3:B8) $ 1,290,351.29 Less: In Cost $    -1,000,000 NPV @ 16% $ 290,351.29 It is @ 60% $ 483,918.82 after tax sale value

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.