Purchase Solution

# After tax cash flow, NPV of projects

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#1 The Acme Manufacturing has a project involving the purchase of equipment for \$35,000 that will increase sales of Acme Manufacturing by \$ 14,500 per year. The annual running costs of this equipment for the first 3 years are \$ 1,000, \$ 2,000, and \$ 4,000 respectively. It will increase by \$ 3,500 every year from then on. The equipment is sold for \$ 5,000 at the end of year 5. The MARR for the owner of this equipment is 10%, their tax rate is 20% and they use DDB depreciation assuming 5-year life and \$5,000 salvage value.

A - Determine the after tax cash flow of this project.

B - What is the after tax NPV of this project?

Acme Manufacturing has other projects going that are very profitable and will use the tax credit (if any) from this project.

#2 The local independent newspaper had purchased a printing press for \$150,000 and has been depreciating it using straight-line depreciation assuming a life of 5 years and resale value of \$30,000. The operation of this equipment produces an annual operating profit of \$35000. At this moment, that is, at the end of the third year after purchase it is considering two options. Option A is to sell the equipment at \$30,000 and put the net proceeds in a bank at 10% for the next two years. Option B is to keep operating the equipment for the next two years and then sell it at \$10,000. The newspaper has an MARR of 10% and is giving you \$1,000 to advise them as to which alternative to choose. The newspaper's total state and local tax is 45%. Give the detail of your calculations. The newspaper is profitable and can use the tax effects. In solving this problem you have to consider opportunity cost.

##### Solution Summary

The solution uses NPV (Net Present Value) to evaluate projects. The Acme Manufacturing of a project is examined. The annual running costs of an equipment are analyzed for a project.

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