Question

1) 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. What is your NPV(12%)?

Answer 1

		A	B	C	D	E
	Year	0	1	2	3	4
1	Initial Investment	500,000
2	Working capital Investment	80,000
3	Revenue		200,000	200,000	200,000	200,000
4	MACRCS rate		20%	32%	19.20%	11.52%
5	Dpereciation		100000	160000	96000	57600	Depreciation = Initial Invetsment *MACRS rate
6	EBT= Revenue - Depreciation		100,000	40,000	104,000	142,400
7	Tax = Tax Rate*EBIT		35,000	14,000	36,400	49,840
8	EAT = EBT - Taxes		65,000	26,000	67,600	92,560
9	Depreciation		100,000	160,000	96,000	57,600
10	After Tax Machinesales price					162,500	Salvage Value*(1-tax rate)
11	Cash flows	580,000	165,000	186,000	163,600	312,660
12	Dicsount rate	0.12
	NPV	30,747.82	NPV(A12,B11:E11)

Capital budgeting doesn't include loans and interest payments as they are already adjusted in cost of capital