Question

In performing an after tax analysis for a new $50,000.00 machine for a a fiber optics manufacturing, a cash flow before taxes (CFBT) of $10,000 is expected the first year, $20,000.00 thereafter and $10,000 the last year. If a recovery period of 5 years applies, use an effective tax rate of 35% and a return rate of 8% per year. Assume that the salvage value is zero. Using a MACRS depreciation method a)compute the CFAT, b) determine whether the project is worth pursuing using a PW analysis

Answer 1

TI = Reveneue - Depreciation

Tax = 0.35 * TI

ATCF = TI - Tax + Depreciation

Present value = ATCF / (1+0.08)^ year

Year	Initial cost	Revenue	Depreciation	TI	Tax	ATCF	Discount factor	Present value
0	-50000.00					-50000.00	1.00000	-50000.00
1		10000.00	10000.00	0.00	0.00	10000.00	0.92593	9259.26
2		20000.00	16000.00	4000.00	1400.00	18600.00	0.85734	15946.50
3		20000.00	9600.00	10400.00	3640.00	16360.00	0.79383	12987.10
4		20000.00	5760.00	14240.00	4984.00	15016.00	0.73503	11037.21
5		10000.00	5760.00	4240.00	1484.00	8516.00	0.68058	5795.85
							NPV	5025.91

As NPV =5026 is positive, therefore investment is worth pursuing