Question

A $400,000 investment in a surface mount placement machine produces pre-tax revenue of $47980/yr for 10 years, at which time the SMP machine has a salvage value of $100,000. Based on a 25% income tax rate, a 12% after tax MARR, & SLN depreciation, what will be the ATPW (After Tax Present Worth) of the investment?

Answer 1

Working notes:

(1) Annual depreciation ($) = (Cost - Salvage value) / Useful life = (400,000 - 100,000) / 10 = 300,000 / 10 = 30,000

(2) Taxable income (TI), years 1-9 ($) = Revenue - Depreciation = 47,980 - 30,000 = 17,980

(3) TI, year 10 ($) = 17,980 + 100,000 (Salvage value) = 117,980

(4) After-tax cash flow (ATCF) ($) = [TI x (1 - Tax rate)] + Depreciation

ATCF, years 1-9 ($) = 17,980 x (1 - 0.25) + 30,000 = 17,980 x 0.75 + 30,000 = 13,485 + 30,000 = 43,485

ATCF, year 10 ($) = 117,980 x (1 - 0.25) + 30,000 = 117,980 x 0.75 + 30,000 = 88,485 + 30,000 = 118,485

Therefore,

ATPW ($) = - 400,000 + 43,485 x P/A(12%, 9) + 118,485 x P/F(12%, 10)

= - 400,000 + 43,485 x 4.3282** + 118,485 x 0.3220**

= - 400,000 + 188,211.78 + 38,152.17

= - 173,636.05