Four years ago, a company invested in equipment having an initial cost of $1,250

Question

Four years ago, a company invested in equipment having an initial cost of $1,250,000 and a 6-year technological life. Revenues and expenses are shown in the table below. Sales were not as good as projected, and the company is considering terminating the project. The equipment has been depreciated using MACRS with a GDS property class of 5 years. The state in which the firm operates imposes an 8% corporate income tax. The firm has federal taxable income in the $10,000,000 to $15,000,000 bracket and uses a 10% MARR market hurdle rate for investments. Determine by annual cash flow analysis the NPW, EUAW and IRR of terminating the project at the end of year 4. Equipment Year Revenue 1 $782,550 $429,850 2 $783,800 $362,400 3 $755,400 $388,200 4 $704,150 $406,450 400,000 Expenses Market Value

Explanation / Answer

IRR is 14.4654%, the rate at which NPV is approximately zero.

Particulars Year 0 Year 1 Year 2 Year 3 Year 4 a Revenue          782,550          783,800          755,400          704,150 Less: Expenses          429,850          362,400          388,200          406,450 Depreciation          250,000          400,000          240,000          144,000 b Total expense          679,850          762,400          628,200          550,450 c=a-b Profit before tax          102,700            21,400          127,200          153,700 Tax@ 8%              8,216              1,712            10,176            12,296 Profit after tax            94,484            19,688          117,024          141,404 Add: Depreciation          250,000          400,000          240,000          144,000 Annual operating cash flow after tax          344,484          419,688          357,024          285,404 Investment         (1,250,000) Salvage value          385,280 d Net cash flow for the year         (1,250,000)          344,484          419,688          357,024          670,684 e Discount rate@ 10% 0.909090909 0.82644628 0.7513148 0.68301346 0.62092132 f=d*e Discounted cash flow (1,136,363.64)    284,697.52    315,317.81    243,852.20    416,442.00 g NPV(total of discounted cash flow)         123,945.88 h Annuity present value factor (10%, 4 years) 2.88169586 i=g/h EUAW            43,011.44

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