Question

An investor borrows $200,000 (in year zero) at an annual interest rate of 10%. The equipment purchased with the borrowed money will produce revenues of $90,000 annually and has operating costs of $15,000 annually for Years 1 through 5. The capital cost is depreciable over 6 years (from year 0 to year 5) based on MACRS 5-year life depreciation with the half year convention (table A-1 at IRS). The machine has no salvage value and there is no working capital requirement. The loan is repaid using the Constant Payment Loan method.

Assuming a tax rate of 40% and an annual discount rate of 15%, calculate the Net Present Value for this investment.

Note: If you calculate negative taxable income for any year, the tax in that year is zero.

Answer 1

Year	Inv.	Ops Cost	MACRS	Deprecition	Interest	Income	Tax	PAT	CF
0	-200000	0	20	40000	20000		0	0
1	90000	15000	32	64000	20000	-9000	0	-9000	-7826.09
2	90000	15000	19.2	38400	20000	16600	6640	9960	7531.191
3	90000	15000	11.52	23040	20000	31960	12784	19176	12608.53
4	90000	15000	11.52	23040	20000	31960	12784	19176	10963.94
5	90000	15000	5.76	11520	20000	43480	17392	26088	12970.35
									36248
		NPV = 200000 - 36248
			-163752