A company is deciding whether to lease or purchase an asset. In this question we will...

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A company is deciding whether to lease or purchase an asset. Inthis question we will evaluate the NPV of the purchasedecision.
The capital cost required to purchase the asset is $1,000,000(at time zero) with a salvage value of $500,000 at the end of the5th year. The purchased asset can be depreciated based on MACRS5-year life depreciation with the half year convention (table A-1at IRS) over six years (from year 0 to year 5).
The asset would yield annual revenue of $350,000 for five years(from year 1 to year 5) and operating cost of $60,000 for year 1 to5. If the income tax is 40% and the annual discount rate is 16%,calculate the NPV for the purchase decision

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4.1 Ratings (537 Votes)

	0	1	2	3	4	5
Annual revenue		$ 3,50,000	$ 3,50,000	$ 3,50,000	$ 3,50,000	$ 3,50,000
Operating cost		$ 60,000	$ 60,000	$ 60,000	$ 60,000	$ 60,000
Depreciation		$ 2,00,000	$ 3,20,000	$ 1,92,000	$ 1,15,200	$ 1,15,200
NOI		$ 90,000	$ -30,000	$ 98,000	$ 1,74,800	$ 1,74,800
Tax at 40%		$ 36,000	$ -12,000	$ 39,200	$ 69,920	$ 69,920
NOPAT		$ 54,000	$ -18,000	$ 58,800	$ 1,04,880	$ 1,04,880
Add: Depreciation		$ 2,00,000	$ 3,20,000	$ 1,92,000	$ 1,15,200	$ 1,15,200
OCF		$ 2,54,000	$ 3,02,000	$ 2,50,800	$ 2,20,080	$ 2,20,080
Capital expenditure	$ 10,00,000
After tax salvage value =-((500000-(500000-57600)*40%)) =						$ -3,23,040
FCF	$ -10,00,000	$ 2,54,000	$ 3,02,000	$ 2,50,800	$ 2,20,080	$ 5,43,120
PVIF at 16% [PVIF = 1/1.16^n]	1	0.86207	0.74316	0.64066	0.55229	0.47611
PV at 16%	-1000000	218966	224435	160677	121548	258587
NPV	-15788

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A company is deciding whether to lease or purchase an asset. Inthis question we will evaluate the NPV of the purchasedecision.The capital cost required to purchase the asset is $1,000,000(at time zero) with a salvage value of $500,000 at the end of the5th year. The purchased asset can be depreciated based on MACRS5-year life depreciation with the half year convention (table A-1at IRS) over six years (from year 0 to year 5).The asset would yield annual revenue of $350,000 for five years(from year 1 to year 5) and operating cost of $60,000 for year 1 to5. If the income tax is 40% and the annual discount rate is 16%,calculate the NPV for the purchase decision