Question

You purchased a machine for $500,000 (installed), and you depreciated it using a 5 year MACRS. This machine generates $200,000 in annual revenue. In year 4, you sold the machine for $250,000. You received a loan for $400,000 on a 5 year loan at 5% (note, you must pay the remaining balance of this loan at the end of year 4 from the proceeds of the sale). In addition, you invested $80,000 in working capital initially. Your company is in a 35% tax bracket. MARR =15.36% Generate your cash flow analysis using Actual Dollars. In other words, inflate your revenue, salvage value, expenses and Working Capital accordingly. What is your Market NPW?

Answer 1

Loan Received = $ 400000, Interest Rate = 5 % , Loan Tenure = 5 yeasrs, Let the annual repayments be $ K

400000 = K x (1/0.05) x [1-{1/(1.05)^(5)}]

K = $ 92389.92

Loan Balance at the end of Year 4 = 92389.92 / 1.05 = $ 87990.4

Salvage Value of Machine = SV = $ 250000 and Book Value at end of Year 4 = BV = $ 86400

Gain/Loss on Taxation on Sale = (SV - BV) x Tax Rate = (250000 - 86400) x 0.35 = $ 57260

After-Tax Salvage Value = Salvage Value - Gain/Loss on Taxation on Sale = 250000 - 57260 = $ 192740