You bought a survey device at $700,000 at beginning of year 1. You expect to use

Question

You bought a survey device at $700,000 at beginning of year 1. You expect to use it to generate an annual revenue of $400,000 for year 1 and increase at 4% per year. The operating expenses will be $ 160,000 for year 1 and increase at 3% per year. At end of year 3, you can sell the device for $280,000 and close the business. Assuming you will have an income tax rate of 30% every year and a capital gain tax rate of 15% at year 3 and you will take depreciation charge every year based on the MACRS schedule as follows: Year 1 20% Year 2 32% Year 3 19.2% Part 1 Assuming all cash investment and using a MARR of 25%, what is the Net Present Value of this 3-year business and what is the IRR? Show the results as formatted below: 1 2 3 Revenue Operating Expense EBITDA Depreciation Charge Taxable Income Tax @30% tax rate Net Income CFAT Also clearly show the calculations of each year’s Depreciation Charges, Cash Flow After Tax at Year 3 for selling of the device and calculations of the present value and IRR, separately.

Explanation / Answer

Salvage Value of machine

calculation of net present value 1 2 3 a Revenue $400,000 $416,000 $432,640 b Operating Expense $160,000 $164,800 $164,944 c ebitda ( a - b ) $240,000 $251,200 $267,696 d Depreciation Charge $140,000 $224,000 $134,400 g Taxable Income ( c - d ) $100,000 $27,200 $133,296 h Tax @ 30% on g $30,000 $8,160 $39,989 I Net Income ( g - h ) $70,000 $19,040 $93,307 j add : depreciation $140,000 $224,000 $134,400 k

Salvage Value of machine

$268,240 l net cash flows ( I + j + k ) $210,000 $243,040 $495,947 m present value factors at 25 % 0.8 0.64 0.512 n present value cash flows ( l * m ) $168,000 $155,546 $253,925 o total present value cash flows $577,471 calculation of depreciation year 1 2 3 cost of the asset 700000 700000 700000 macrs deprecition rate 20% 32% 19.20% depreciation amount 140000 224000 134400 total depreciation 498400 book value of the asset at the end of the year 3 cost of the asset - total depreciation book value of the asset at the end of the year 3 700000 - 498400 book value of the asset at the end of the year 3 201600 sale value of the devise at the end of year 3 280000 profit on sale of the asset 280000 - 201600 profit on sale of the asset 78400 capital gain tax rate 15% capital gain tax amount 78400 * 15 % capital gain tax amount 11760 net balance amount value 280000 - 11760 net balance amount value 268240 net present vaue present value of cash flows - cost of the device net present vaue 577471 - 700000 net present vaue -122529 calculation of irr of the decice year 0 1 2 3 net cash flows -700000 210000 243040 495947 irr using excel formula irr . Irr ( cash flows form year 1 to year 3 ) irr 14%

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