After Tax Net Present Value and IRR non MACRS rules Background

After tax net present value and irr non macrs rules

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Exercise 12-35: After-Tax Net Present Value and IRR (non-MACRS rules) Background Data Purchase price and installation cost of new computer system $ 60,000 Cost to operate each year $ 30,000 Estimated useful life in years 4 Expected cost reduction per year $ 62,000 Cost of capital (discount rate) 10% Income tax bracket 30% Required Solution Part 1 a) $ 32,000 $ 101,440 NPV $ 41,440 b) Net cash inflow before depreciation $ 32,000 15,000 Increase in net income before tax $ 17,000 Income tax rate 30% Income tax $ 5,100 $ 26,900 $ 85,273 $ 25,273 (Note: PV annuity factor obtained from Appendix C, Table 2) c) Straight-line depreciation rate 25% Double-declining-balance rate 50% Beginning Book Depreciation Accumulated Ending Year Value Expense Depreciation Book Value 0 $60,000 1 $ 60,000 $ 30,000 $ 30,000 $30,000 2 $ 30,000 $ 15,000 $ 45,000 $15,000 3 $ 15,000 $ 7,500 $ 52,500 $7,500 4 $ 7,500 $ 7,500 $ 60,000 $0 Net 30% After-tax 10% Cash Depreciation Taxable Income Net Cash Discount Present Year Inflow Expense Income Taxes Inflow Factor* Value 0 $ (60,000) $ (60,000) 1.000 ($60,000) 1 32,000 $ 30,000 $ 2,000 $ 600.00 31,400 0.909 $28,543 2 32,000 15,000 17,000 5,100 26,900 0.826 $22,219 3 32,000 7,500 24,500 7,350 24,650 0.751 $18,512 4 32,000 7,500 24,500 7,350 24,650 0.683 $16,836 $26,110 Part 2 Net cash inflow each year ($62,000 $30,000) Present value of net cash inflows ($32,000 × 3.170*) ( Note : PV annuity factor obtained from Appendix C, Table 2) Depreciation expense ($6,000 ÷ 4 years) Net after-tax cash inflow per year ($32,000 $5,100) Present value of net cash inflows ($26,900 × 3.170*) NPV ($85,273 $60,000) ( Note: PV factors obtained from Appendix C, Table 1) a) Net cash inflow each year = $32,000 ($62,000 $30,000) $60,000 = $32,000 x A ?, 4
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Using the built-in IRR function in Excel: Formula Estimated IRR = 39.08% =IRR(F62:F66,0.1) b) After-tax cash flows: Year Amount 0 $ (60,000) 1 $ 26,900 2 $ 26,900 3 $ 26,900 4 $ 26,900 Using the Built-in Function in Excel: Estimated IRR = 28.27% =IRR(F80:F84,0.1) We can also use the annuity tables in the text (Appendix C), and interpolation, to estimate the project's IRR, as follows: Discount Discount Rate Factor 25% 25% 2.362 2.362 ? 2.230 30% 2.166 Difference 5% ? 0.196 0.132 Internal Rate of Return 28.37% A ?, 4 = 1.875, which has a rate of return greater than 30%. By inspection of the annuity factors in Appendix C, Table 2, we see that: $60,000 = $26,900 x A ?, 4 A ?, 4 = 2.230, which corresponds to adiscount rate somewhere between 25% and 30%
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Exercise 12-36: Using Arrays in Excel to Calculate Net Present V Background Please refer to footnote #12 in Chapter 12 and the data referenced in this footn Data--Part 1 WACC 10.00% After-tax cash flows: Year CF 0 ($680,000) 1 $178,000 Alternative Formulas (hit: 2 $208,000 $29,240 =SUM((CF)/((1+ 3 $208,000 $29,240 =SUM((CF)/((1+ 4 $321,000 Formula (remember: hit ctl+shift+enter) NPV = $29,240 =SUM((B12:B16)/((1+$B$9)^Y)) Data--Part 2 WACC 10.00% After-tax cash flows: Yr CashFlows 0 ($1,000) 1 $100 2 $200 3 $300 4 $400 5 $500 6 $600 Alternative Formulas (hit: 7 $700 $1,904 =SUM((CashFlo 8 $800 $1,904 =SUM((CashFlo 9 $900 10 $1,000 Formula (hit: ctl+shift+enter) NPV = $1,904 =SUM((B25:B35)/((1+$B$22)^Yr))
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Required 1. Follow the directions given in footnote #12 to calculate the NPV of the refere specified help file (Microsoft website) if need be. First, define variable names (go to "Formulas," then "Define Names"). For e through A16 as "Year," and cells B12 through B16 as "CF." Next, enter into an open cell (e.g., B18) the following formula to calculate the =SUM(CF/(1+WACC)^Year) Finally, rather than hitting "enter," you now hit the following (to enter the arra now display the correct amount, $29,240 (rounded).
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