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"You purchased an airplane for $450,000 and will depreciate it using a 7-year MACRS with a...

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"You purchased an airplane for $450,000 and will depreciate itusing a 7-year MACRS with a 5-year life. Salvage value in year 5 isexpected to be $176,000. The airplane is expected to increaserevenues by $144,000 per year. However, O&M costs are expectedto be $29,000 per year. Your company is in the 21% tax bracket andyour MARR is 18%. What is the Net Present Worth of thisinvestment?"

Answer & Explanation Solved by verified expert
4.3 Ratings (668 Votes)

Cashflows
1 2 3 4 5
Incremental revenue 144000 144000 144000 144000 144000
Less: Incremental expensnes 29000 29000 29000 29000 29000
Less: Depreciation 64305 110205 78705 56205 40185
Before tax Income 50695 4795 36295 58795 74815
Less: tax @ 21% 10645.95 1006.95 7621.95 12346.95 15711.15
After tax income 40049.05 3788.05 28673.05 46448.05 59103.85
After tax salavge:
Book value at the end of 5th yr (450000*22.31%) 100395
Sale value of assets 176000
Gain on sale 75605
tax on sale 15877
Net after tax salvage 59728
NPV
0 1 2 3 4 5
Investment -450000
Annual cashflows 40049.05 3788.05 28673.05 46448.05 59103.85
After tax salvage 59728
Net cashflows -450000 40049.05 3788.05 28673.05 46448.05 118831.9
PVF at 18% 1 0.847458 0.718184 0.608631 0.515789 0.437109
Present value of CF -450000 33939.87 2720.519 17451.3 23957.39 51942.5
NPV -319988

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Transcribed Image Text

"You purchased an airplane for $450,000 and will depreciate itusing a 7-year MACRS with a 5-year life. Salvage value in year 5 isexpected to be $176,000. The airplane is expected to increaserevenues by $144,000 per year. However, O&M costs are expectedto be $29,000 per year. Your company is in the 21% tax bracket andyour MARR is 18%. What is the Net Present Worth of thisinvestment?"

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