1.) A company is considering the installation of a new machine that costs $150,000. The machine...


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1.) A company is considering the installation of a new machine that costs $150,000. The machine is expected to lead to a new net income of $40,000 per year for the next five years. Using SL depreciation, $0 salvage value, and an effective income tax rate of 50% determine the after-tax rate of return for this investment.

If the company's after-tax MARR rate is 10%, would this be a good investment or not?

2.) An auto supplier installed new equipment costing $1,050,000. The equipment generated new income averaging $300,000 per year, and its operating costs averaged $48,000 per year. The equipment was depreciated using the MACRS method, assuming a recovery period of 7 years and no salvage value. However, the equipment was kept in service for a total of 10 years, after which time a scrap dealer bought it for $60,000. The company uses an after-tax MARR rate of 8% per year and is in the 30% tax bracket.

Determine the equipment's after-tax net present worth over the 10-year service period.

Net Present value:

"Net Present value" is calculated by deducting the initial cash flow of the asset from the total of present value of annuity of annual cash flow and present value of salvage value of asset. MARR rate is discount rate used in calculation of net present value.

Answer and Explanation: 1

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1)The after-tax rate of return for this investment and to determine whether a investment is good or not is calculated or explained below:

Annual Net...

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How to Calculate Net Present Value: Definition, Formula & Analysis


Chapter 5 / Lesson 20

Learn about what net present value is, how it is calculated both for a lump sum and for a stream of income over multiple years. View some examples on NPV.

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