Purchase Solution

# MACRS and Present Value

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The general manager of a mining company has a chance to purchase a new drill at a total cost of \$250000. recovery period is 5 years. Additional annual pretax cash inflow from operations is \$82000. economic life of drill 5 years with no salvage value. tax rate is 35% and the after tax required rate of return is 16%.
1.Compute the NPV, assuming MACRS depreciation for tax purposes. Should the company acquire the drill?
2. suppose the economic life of the drill is 6 years, which means that there will be an \$82000 cash inflow from operations in the sixth year. recovery period is still 5 years. Should the company acquire the drill? show the calculations,

##### Solution Summary

Your tutorial shows two schedules in Excel to show you how to compute after tax operating cash flow and the tax benefit of the MACRS depreciation with and without the sixth year. A decision is recommended and a reference is given. An illustration of how the after-tax cash flows works and the tax benefit of depreciation is given for those that need a bit more coaching on that aspect.

##### Solution Preview

See the attached file.

1.Compute the NPV, assuming MACRS depreciation for tax purposes. Should the company acquire the drill?

See excel for tutorial schedule showing how to analyze. No, this drill does not earn more than 16% annually required by the decision criteria and ...

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• MSc, University of Virginia
• PhD, Georgia State University
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