MACRS Depreciation: Net Present Value & Internal Rate of Return
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MACRS: The equipment cost is $50,000 and it would cost another $10,000 to modify it. Assume that the equipment falls into the MACRS 3-year class. The equipment will be sold after 3 years for $20,000. It would require an increase in net working capital of $2,000 at the start of the project. This working capital would be recovered at the end of the project. The new project will not have an effect on revenues but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. Assume a tax rate of 40% and a cost of capital is 10%. What are the NPV and IRR of the project? Should the equipment be purchased? The MACRS allowance percentages for the 3-year asset class are as follows, commencing with year one: 33.33%, 44.45%, 14.81%, 7.41%.
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