Question

You purchased an airplane for $500,000 and will depreciate it using a 7-year an MACRS. Salvage value in year 4 is expected to be $250,000. The airplane is expected to increase revenues by $200,000 per year, however, O&M costs are expected to be $30,000 per year. Your company is in a 40% tax bracket and your MARR is 15%. Show the end of year cash flows for this project for years 0 through 4. What is the Net Present Worth of this investment?
Year 0_____
Year 1____
Year 2______
Year 3_____
Year 4______
NPW_____

Answer 1

Answer:

Year 0 = -$500,000

Year 1 = $130,580

Year 2  = $150,980

Year 3 = $136,980

Year 4 = $433,260

NPV = $65,495

Explanation:

depreciation expense per year under 7 year MACRS table:

year 1 = $500,000 x 14.29% = $71,450

year 2 = $500,000 x 24.49% = $122,450

year 3 = $500,000 x 17.49% = $87,450

year 4 = $500,000 x 12.49% = $62,450

cash flow year 1 = [($200,000 - $30,000 - $71,450) x (1 - 40%)] + $71,450 = $130,580

cash flow year 2 = [($200,000 - $30,000 - $122,450) x (1 - 40%)] + $122,450 = $150,980

cash flow year 3 = [($200,000 - $30,000 - $87,450) x (1 - 40%)] + $87,450 = $136,980

cash flow year 4 = [($200,000 - $30,000 - $62,450 + $93,800 gain on sale) x (1 - 40%)] + $62,450 + $250,000 = $433,260

MARR = 15%

using a financial calculator, NPV = $65,495