1.Consider the following cash flow: Year Amount 0 -1000 1 to 5 300 Using a incom
ID: 2654572 • Letter: 1
Question
1.Consider the following cash flow:
Year Amount
0 -1000
1 to 5 300
Using a income tax rate of 34% and a MARR of 12%, calculate the After-tax NPV assuming MACRS depreciation, and a 3-year property class.
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2. Two mutually exclusive projects have the estimated cash flows shown below. Use a future worth analysis to determine which should be selected at an interest rate of 10% per year.
Q
R
First cost, $
42,000
80,000
Annual Cost, $
6,000
$7,000 year 1, increasing by a $1,000 per year
Salvage value, $
0
4,000
Life, years
4
8
Q
R
First cost, $
42,000
80,000
Annual Cost, $
6,000
$7,000 year 1, increasing by a $1,000 per year
Salvage value, $
0
4,000
Life, years
4
8
Explanation / Answer
Answer:
Calculation of Net Present value
Years
Cash Flows (CF)
PVF (12%)
PV = CF * PVF
Initial Cash Flow
0
$ (1,000.00)
1
$ (1,000.00)
Annual Cash Flows (Net of tax) = 300*(1-0.34)
1 to 5
$ 198.00
3.60478
$ 713.75
Tax Saving on depreciation
300*33.33%*34%
1
$ 34.00
0.89286
$ 30.35
300*44.45%*34%
2
$ 45.34
0.79719
$ 36.14
300*14.81%*34%
3
$ 15.11
0.71178
$ 10.75
300*7.41%*34%
4
$ 7.56
0.63552
$ 4.80
Net Present value =Sum of PVs
$ (204.20)
Calculation of Net Present value
Years
Cash Flows (CF)
PVF (12%)
PV = CF * PVF
Initial Cash Flow
0
$ (1,000.00)
1
$ (1,000.00)
Annual Cash Flows (Net of tax) = 300*(1-0.34)
1 to 5
$ 198.00
3.60478
$ 713.75
Tax Saving on depreciation
300*33.33%*34%
1
$ 34.00
0.89286
$ 30.35
300*44.45%*34%
2
$ 45.34
0.79719
$ 36.14
300*14.81%*34%
3
$ 15.11
0.71178
$ 10.75
300*7.41%*34%
4
$ 7.56
0.63552
$ 4.80
Net Present value =Sum of PVs
$ (204.20)
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