Question

Using an MACRS depreciation schedule having a class life of 5 yr, (a) Compute the cash flows. (b) At an effective interest rate of 20%, determine the net present value. (c) Is the investor’s rate of return less than or greater than 20%? Explain. (d) Compute the investor’s rate of return.

Answer 1

Straight-Line

Depreciation MACRS

Depreciati

Year 1 $ 10,000 $ 20,000

Year 2 20,000 32,000

Year 3 20,000 19,200

Year 4 20,000 11,520

Year 5 20,000 11,520

Year 6 10,000 5,760

Totals $ 100,000 $ 100,000

Compute the net present value of the investment if MACRS depreciation is used. Use 10% as the discount rate.

Net income after tax depreciation Net Cas flow

(1) (2) (3)=(1)+(2)

$ 100,000

$100,000

$32,240.00 $20,000.00 $52,240.00

$24,800.00 $32,000.00 $56,800.00

$32,736.00 $19,200.00 $51,936.00

$37,497.00 $11,520.00 $49,017.60

$37,497.00 $11,520.00 $49,017.60

$41,068.00 $5,760.00 $49,017.60

Compute the net present value:

Year Net cas flow PVF@20% Present Value

(1) (2) (3)=(1)x(2)

0 $100,000.00 1 $100,000

1 $52,240.00 0.909 $47,486.16

2 $56,800.00 0.826 46,916.80

3 $51,936.00 0.751 $39,003.94

4 $49,017.60 0.683 $33,479.02

5 $49,017.60 0.621 $30,439.33

6 $46,828.80 0.564 $26,411.44

NPV $123,739.29

Step-by-step explanation: