Assume you have been asked to evaluate an investment in capital equipment for the production of biofuels. The machine will cost $215,000 and it will last 10 years (useful and depreciation lifespans). Using straight-line depreciation, the salvage value for the investment is $0. You expect the equipment to have a terminal value of $20,000 at the end of the investment period. The machine has an annual maintenance cost of $6,000. Your marginal tax rate is 30%; remember that you get to keep (1-m) for everything other than the depreciation shield on an after-tax basis (it’s simply m * depreciation shield). Your after tax-cost of capital (discount rate) is 9.5%. Labor costs in the production of biofuels are $17,500/year. The machine will produce 25,500 units of biofuel annually that will be sold at $2.50/unit. Fill in the missing pieces (a through h) in the table below to complete the NPC analysis Item Pre-tax After-tax Time Growth Rate Discount Rate P.V. Factor Present Value Machine -$215,000 -$215,000 0 - 0.095 1.0 -$215,000.00 Depr. Shield 21,500 1-10 0 0.095 Term.Valuea 20,000 10 0 0.095 $5,649.20 Repairs -6,000 1-10 0 0.095 NPV -$195,223.51 NPC $195,223.51 After-tax annual amount = PV(i/(1-(1+i)-n)) = 1/(PV Factor).You will need the following formulas to complete the table: [1-(1+i)-n]/i; (1+r)-n;Hint: After-tax cost of repairs is calculated exactly the same as the after-tax terminal value. Do NOT worry about number formatting (i.e. just type in the number), but DO round all answers to two (2) places to the right of the decimal.
Assume you have been asked to evaluate an investment in capital equipment for the production of biofuels. The machine will cost $215,000 and it will last 10 years (useful and
The machine has an annual maintenance cost of $6,000. Your marginal tax rate is 30%; remember that you get to keep (1-m) for everything other than the depreciation shield on an after-tax basis (it’s simply m * depreciation shield). Your after tax-cost of capital (discount rate) is 9.5%. Labor costs in the production of biofuels are $17,500/year. The machine will produce 25,500 units of biofuel annually that will be sold at $2.50/unit.
Fill in the missing pieces (a through h) in the table below to complete the NPC analysis
|
Item |
Pre-tax |
After-tax |
Time |
Growth Rate |
Discount Rate |
P.V. Factor |
|
|
Machine |
-$215,000 |
-$215,000 |
0 |
- |
0.095 |
1.0 |
-$215,000.00 |
|
Depr. Shield |
21,500 |
|
1-10 |
0 |
0.095 |
|
|
|
Term.Valuea |
20,000 |
|
10 |
0 |
0.095 |
|
$5,649.20 |
|
Repairs |
-6,000 |
|
1-10 |
0 |
0.095 |
|
|
|
|
|
|
|
|
|
|
-$195,223.51 |
|
NPC |
|
|
|
|
|
|
$195,223.51 |
- After-tax annual amount = PV(i/(1-(1+i)-n)) = 1/(PV Factor).
You will need the following formulas to complete the table: [1-(1+i)-n]/i; (1+r)-n;
Hint: After-tax cost of repairs is calculated exactly the same as the after-tax terminal value.
Do NOT worry about number formatting (i.e. just type in the number), but DO round all answers to two (2) places to the right of the decimal.
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