Tax depreciation is straight-line over three years. Pre-tax salvage value is 25 in Year 3 and 50 if the asset is scrapped in Year 2. Tax on salvage value is 40% of the difference between salvage value and book value of the investment. The cost of capital is 20%

 

Question

1) Suppose that the government now changes tax depreciation to allow a 100% write-off in Year 1 what would be NPV of project.

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1. Initial investment 2. Revenues 3. Cash operating costs 4. Tax depreciation 5. Income pretax 6. Tax at 40% 7. Net income 8. After-tax salvage 9. Cash flow (7 +8+4-1) NPV at 20% = 0 0 100 - 100 1 100 50 33.33 16.67 6.67 10 +43.33 2 100 50 33.33 16.67 6.67 10 +43.33 3 100 50 33.33 16.67 6.67 10 15 +58.33 1. Initial investment 2. Revenues 3. Cash operating costs 4. Tax depreciation 5. Income pretax 6. Tax at 40% 7. Net income 8. After-tax salvage 9. Cash flow (7 +8+4-1) NPV at 20% = 0 0 100 - 100 1 100 50 33.33 16.67 6.67 10 +43.33 2 100 50 33.33 16.67 6.67 10 +43.33 3 100 50 33.33 16.67 6.67 10 15 +58.33 1. Initial investment 2. Revenues 3. Cash operating costs 4. Tax depreciation 5. Income pretax 6. Tax at 40% 7. Net income 8. After-tax salvage 9. Cash flow (7 +8+4-1) NPV at 20% = 0 0 100 - 100 1 100 50 33.33 16.67 6.67 10 +43.33 2 100 50 33.33 16.67 6.67 10 +43.33 3 100 50 33.33 16.67 6.67 10 15 +58.33 1. Initial investment 2. Revenues 3. Cash operating costs 4. Tax depreciation 5. Income pretax 6. Tax at 40% 7. Net income 8. After-tax salvage 9. Cash flow (7 +8+4-1) NPV at 20% = 0 0 100 - 100 1 100 50 33.33 16.67 6.67 10 +43.33 2 100 50 33.33 16.67 6.67 10 +43.33 3 100 50 33.33 16.67 6.67 10 15 +58.33

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