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
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