Given the following information, calculate the NPV of a proposed
project: Cost = $4,000; estimated life = 3 years; initial decrease in
accounts receivable = $1,000, which must be restored at the end of the
project’s life; estimated salvage value = $1,000; earnings before
taxes and depreciation = $2,000 per year; method of depreciation =
MACRS; tax rate = 40 percent; and cost of capital = 18 percent.





0 	0% 	A . 	$1,137
0 	0% 	B . 	-$ 151
0 	0% 	C . 	$ 137
0 	0% 	D . 	$ 804
0 	0% 	E . 	$ 544

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Request for Question Clarification by ragingacademic-ga on 17 Dec 2002 09:27 PST

jucylove - 

I need to know what MACRS table you would be using.
I used one I found at -

http://taxguide2002.completetax.com/tools/download/deptablesA1.rtf

but am not coming up with the correct answer.

Please post the depreciation factors for years 1,2,3.

thanks,
ragingacademic

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Clarification of Question by jucylove-ga on 17 Dec 2002 09:46 PST

3 year MACRS with the 1/2 year method
depreciations for:
Y0=0
Y1=33%
Y2=45%
Y3=15%
Y4=7%

I usually mess these up by trying to find actual rates instead of the
tax savings for this.

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Request for Question Clarification by ragingacademic-ga on 17 Dec 2002 12:07 PST

jucylove - 

I have worked this every which way I could think of - and do not come
up with either of the five options...

Could you please double check all the data?

thanks
ragingacademic

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Clarification of Question by jucylove-ga on 17 Dec 2002 19:10 PST

ok, thanks, 
If you had worked the actual accounting values then perhaps we just
need to subtract the taxes from it...except for the depreciation in
which case we are just figuring the tax savings only.

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Clarification of Question by jucylove-ga on 17 Dec 2002 20:56 PST

This is a sample question similar.



12-7	a.	The net cost is $178,000:

Cost of investment at t = 0:

Base price                         ($140,000)
Modification                         (30,000)
Increase in NOWC                      (8,000)
Cash outlay for new machine        ($178,000)

b.	The operating cash flows follow:

                             Year 1    Year 2    Year 3  
After-tax savings           $30,000   $30,000   $30,000
Depreciation tax savings     22,440    30,600    10,200
Net operating cash flow     $52,440   $60,600   $40,200


Notes:

1.	The after-tax cost savings is $50,000(1 — T) = $50,000(0.6) =
$30,000.

2.	The depreciation expense in each year is the depreciable basis,
$170,000, times the MACRS allowance percentages of 0.33, 0.45, and
0.15 for Years 1, 2, and 3, respectively.  Depreciation expense in
Years 1, 2, and 3 is $56,100, $76,500, and $25,500. The depreciation
tax savings is calculated as the tax rate (40 percent) times the
depreciation expense in each year.

c.	The terminal cash flow is $48,760:

Salvage value           $60,000
Tax on SV*              (19,240)
Return of NOWC            8,000
                        $48,760

Remaining BV in Year 4 = $170,000(0.07) = $11,900.

*Tax on SV = ($60,000 - $11,900)(0.4) = $19,240.

d.	The project has an NPV of ($19,549).  Thus, it should not be
accepted.

Year    Net Cash Flow    PV @ 12%  
  0      ($178,000)     ($178,000)
  1         52,440         46,821
  2         60,600         48,310
  3         88,960         63,320
                 NPV =  ($ 19,549)

Alternatively, place the cash flows on a time line:

    0            1            2            3
    |            |            |            |
-178,000       52,440       60,600       40,200
                                         48,760
                                         88,960

With a financial calculator, input the appropriate cash flows into the
cash flow register, input I = 12, and then solve for NPV = -$19,549.

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Request for Question Clarification by ragingacademic-ga on 17 Dec 2002 21:43 PST

jucylove - 

Here's my calculation.
I did have an error, corrected it per the example - did not tax the
salvage value.  However, otherwise, I really can't find anything
wrong.

	         0	1	2	3
cost	        -4000			
A/R	        -1000			

Total Cost	-5000			

Earnings		2000	2000	2000
Tax @ 40%		800	800	800
Depreciation		1333.2	1800	600
Depreciation Effect	533.28	720	240
Pos Cash Flow		1733.28	1920	1440

Pos Cash Flow		1733.28	1920	1440
Add back A/R				1000
Salvage, After Tax			600
				
Discount factor @ 18%	0.862	0.743	0.641
Discounted CF	-5000	1494.2	1426.9	1947.6
				
Summary	-5000	1494.2	1426.9	1947.6
NPV ->	-131.3210054			

At 13% cost of capital , I get ~$144, which is only $7 off of (C).
Could it be 13% and not 18%?

thanks,
ragingacademic

Someone may be able to help if you explain the MPV or tell what the
letters stand for.   Neil

You said Mpv, 
NPV is the name of the button on the calculator.
It means Net Present Value of a project's benefit after taxes and
expenses are subtacted.
This is a capital budgeting problem.

I am not looking for guesses...if you don't really know what the NPV
is , then you would probably not come to the correct solution.

I know enough about the concepts that I can tell if the rationale is correct.
I see that I can pay extra if I'm happy for tip!

Same thing happens to me.
I know the secret is not to look for accounting straight, but to look
for the savings according to cash flows.
I appreciate your help, I still have three days.

and then I'll be back in to graphics and no more math for quite a
while.

PS I also noticed that on one of the others.  The answer was looking
different, because of rounding.
When I took out the decimal places and rounded it even it matched.

jucylove -

I assume you've double checked the data.
I'm not close enough for rounding...
I've checked 8-10 times, and it looks like I'm doing it right...

ragingacademic

B is the only negative answer, I was going to choose this since all
the different answers I got are all negative.

jucylove -

Good luck.
I can't do any better with the same data.

thanks,
ragingacademic