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 8%. Please type out your calculations and explain.

Explanation / Answer

The NPV is shown in the below table:

Note: The after tax salavage value is 250,000*(1-0.4) = 150,000 since book value at end of 5th iz zero

The dperciation rates used as per macrs table (half year convention is) 20%,32%,19.20%,11.52%,11.52%

The NPV is $1,178,348.37

The sale value (before tax) should be 1,178,348.37/(1-0.4) = $1,963,913.95

Year 0 1 2 3 4 5 Overhaul Cost 1000000 Revenue 900000 900000 900000 900000 900000 Cost 400000 400000 400000 400000 400000 Depreciation as per MACRS half year 200000 320000 192000 115200 115200 Profit before tax 300000 180000 308000 384800 384800 Tax at 40% 90000 54000 92400 115440 115440 Profit after tax 210000 126000 215600 269360 269360 Add back depreciation 300000 180000 308000 384800 384800 After tax salavge value 150000 Operating cash flow -1000000 510000 306000 523600 654160 804160 NPV $   1,178,343.37

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

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