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ss NumberPrinted Name ENGR 222 Final Study Guide Fall 2017 Observe the weights f

ID: 2804428 • Letter: S

Question

ss NumberPrinted Name ENGR 222 Final Study Guide Fall 2017 Observe the weights for each proble 13. A corporation with $3 million in annual taxable income is considering the following investment. Show all work in the space provided. Use the back of this sheet if necessary. State income taxes are 6%. A. Find the values of the net present worth, annual worth and future worth before taxes for a MARR of 12%. Place your answers in the space here: Before Taxes Cash flow Year Cash Flow 0 1-10 5,000 11-20 6,000 NPW/ = -30,000 Aw = Find the rate of return before and after taxes using linear interpolation. Use straight line depreciation and a $2000 salvage value that would be realized at the end of the 20th year. Place your answers here: B. Before Taxes IRR = After Taxes IRR =

Explanation / Answer

Answer a.
The NPW of the project at 12% MARR is

Year

Cashflows

0

-30000

1

5000

2

5000

3

5000

4

5000

5

5000

6

5000

7

5000

8

5000

9

5000

10

5000

11

6000

12

6000

13

6000

14

6000

15

6000

16

6000

17

6000

18

6000

19

6000

20

6000

NPW at 12%

$8,184.32



Answer b.
SLM depreciation with salvage value of 2000 = 30000-2000 / 20 = 1400

Before tax Cashflows 1-10 = 5000 thus no adjustment for depreciation or taxes are made and can be used as net income without taxes
After tax OCF = sales-cost-depreciation*(1-tax) + depreciation
= netincome*(1-tax)+depreciation
=5000*(1-0.06)+1400
=6100

Before tax Cashflows 11-20 = 6000 thus no adjustment for depreciation or taxes are made and can be used as net income without taxes
After tax OCF = sales-cost-depreciation*(1-tax) + depreciation
= netincome*(1-tax)+depreciation
=6000*(1-0.06)+1400
=7040

And terminal year cashflow would be salvage+WCinv-tax*(salvage-bookvalue)
=2000+0 - 0.06*(2000-0)
=2120
which will be added to year 20 cashflow and make it 7040+2120 = 9160

IRR for before tax and after tax cashflows are:

Year

Before tax cashflows

After tax cashflows

0

-30000

-30000

1

5000

6100

2

5000

6100

3

5000

6100

4

5000

6100

5

5000

6100

6

5000

6100

7

5000

6100

8

5000

6100

9

5000

6100

10

5000

6100

11

6000

7040

12

6000

7040

13

6000

7040

14

6000

7040

15

6000

7040

16

6000

7040

17

6000

7040

18

6000

7040

19

6000

7040

20

6000

9160

IRR

16.442%

20.279%


Year

Cashflows

0

-30000

1

5000

2

5000

3

5000

4

5000

5

5000

6

5000

7

5000

8

5000

9

5000

10

5000

11

6000

12

6000

13

6000

14

6000

15

6000

16

6000

17

6000

18

6000

19

6000

20

6000

NPW at 12%

$8,184.32

Annual worth = Aw = PV(i*(1+i)^n / (1+i)^n-1
=8184.32 *(0.12*(1.12)^20 / (1.12)^20-1
=8184.32* (0.12*9.646 / 9.646-1)
=8184.32* (1.1158 / 8.646)
=8184.32*0.1291
=1056.218