Question

8. A project requires a $219,000 investment in equipment. The equipment is expected to worth $128,000 when the project ends in 7 years. Operating savings are expected to be $12,000 in the first year and are expected to increase 5% per year for the life of the project. The CCA rate is 30%, the firm's discount rate is 13%, and the company’s tax rate is 22%. What is the after-tax present value of the annual operating savings? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit any commas and the $ sign in your response. For example, an answer of $1,000.50 should be entered as 1000.50.)

Answer 1

Step 1:

Values from question.

Investment in Equipment	219000.00
Time Frame in Years=	7
Tax Rate =	22%
Salvage Value	128000.00
Discount rate	13%

Step 2: Calculation of Cash flows

Year	0	1	2	3	4	5	6	7
Investment in Equipment	219000.00
Operating Savings		12000.00	12600.00	13230.00	13891.50	14586.08	15315.38	16081.15
Less: Depreciation		65700.00	45990.00	32193.00	22535.10	15774.57	11042.20	7729.54
EBIT		-53700.00	-33390.00	-18963.00	-8643.60	-1188.50	4273.18	8351.61
Tax @ 22%		-11814.00	-7345.80	-4171.86	-1901.59	-261.47	940.10	1837.35
Net Income		-41886.00	-26044.20	-14791.14	-6742.01	-927.03	3333.08	6514.25
Add: Depreciation		65700.00	45990.00	32193.00	22535.10	15774.57	11042.20	7729.54
Free Cash flow		23814.00	19945.80	17401.86	15793.09	14847.54	14375.28	14243.79
After tax Salvage								103807.83
Net Cash flow	219000.00	23814.00	19945.80	17401.86	15793.09	14847.54	14375.28	118051.62
PVF = 1/(1+r)^n		0.885	0.783	0.693	0.613	0.543	0.480	0.425
After Tax Present Value of the Annual Operating Savings		21074.34	15620.49	12060.36	9686.20	8058.65	6904.71	6054.48
Discounted Net Cash Flow		21074.34	15620.49	12060.36	9686.20	8058.65	6904.71	50179.10

Step 3: Calculation of depreciation

Year	Asset	Depreciation Rate	Depreciation	Book Value	Method
1	219000.00	30%	65700.00	153300.00	WDV
2	153300.00	30%	45990.00	107310.00	WDV
3	107310.00	30%	32193.00	75117.00	WDV
4	75117.00	30%	22535.10	52581.90	WDV
5	52581.90	30%	15774.57	36807.33	WDV
6	36807.33	30%	11042.20	25765.13	WDV
7	25765.13	30%	7729.54	18035.59	WDV

Step 4: Salvage value after tax

Book Value at the end of 7th Year	18035.59
Salvage Value	128000.00
Profit	109964.41
Tax @ 22%	24192.17
Salvage Value after tax	103807.83