Question

Firm ABC is considering to invest in a project to reduce costs by $70,000 annually. The...

Firm ABC is considering to invest in a project to reduce costs by $70,000 annually. The equipment costs $200,000, had a 4-year life (will be depreciated as a 3-year MACRS asset), requires no additional investment in net working capital, and has a salvage value of $50,000. The firm’s tax rate is 39% and the required return on investments in this risk class is 10%. What is the NPV and IRR of this project? (The MACRS’s first three years’ depreciation rates in order are: 33.33%, 44.44% and 14.82%.)

Please include a step by step breakdown on a calculator due to needing to model this again and excel would not available (TI calculator steps are fine)! Thank you :)

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Answer #1
ABC 0 1 2 3 4
MACRS % 33.33% 44.45% 14.81% 7.41%
Investment -$200,000.00
Salvage $ 50,000.00
Savings $ 70,000.00 $ 70,000.00 $ 70,000.00 $ 70,000.00
Depreciation -$ 66,660.00 -$88,900.00 -$29,620.00 -$14,820.00
EBT $    3,340.00 -$18,900.00 $ 40,380.00 $ 55,180.00
Tax (39%) -$    1,302.60 $   7,371.00 -$15,748.20 -$21,520.20
Net Income $    2,037.40 -$11,529.00 $ 24,631.80 $ 33,659.80
Cash Flows -$200,000.00 $ 68,697.40 $ 77,371.00 $ 54,251.80 $ 78,979.80
NPV $ 21,099.60
IRR 14.77%

Depreciation = MACRS% x Investment

Compute Net Income as shown above.

Cash Flows = Investment + Net Income + Depreciation + Salvage x (1 - tax)

Insert these cash flows on a calculator. CF0 = -200,000, CF1 = 68,697.4... CF4 = 78,979.80 and I/Y = 10%

=> Compute NPV = $21,099.60 and IRR = 14.77%

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