A 5-year project requires a $300,000 investment in a machine that is expected to worth $50,000 when the project ends. Operating expenses are expected to be $75,000 in the first year and are expected to increase 3% per year over the life of the project. The appropriate discount rate is 8%, the company’s tax rate is 20%, and the CCA rate is 30%. What is the after-tax present value of the annual operating expenses?
| After-tax present value of the annual operating expenses | ||||
| Year | Before-tax opg. Exp.(Increasing by 3% every yr. | After-tax opg. Exp.=BT opg. Exp.*(1-Tax rate) | PV F at 8%(1/1.08^ Yr.n) | PV at 8% |
| 1 | 2 | 3=2*(1-20%) | 4 | 5=3*4 |
| 1 | -75000 | -60000 | 0.92593 | -55555.56 |
| 2 | -77250 | -61800 | 0.85734 | -52983.54 |
| 3 | -79567.5 | -63654 | 0.79383 | -50530.6 |
| 4 | -81954.53 | -65563.62 | 0.73503 | -48191.22 |
| 5 | -84413.16 | -67530.53 | 0.68058 | -45960.14 |
| -253221.05 | ||||
| After-tax present value of the annual operating expenses = | ||||
| -253221.05 | (ANSWER) | |||
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