Compute the NPV of the project if the discount rate is 9%.
Can you help in calculating the
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Consider the following data |
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- A machine costs $600 today (year 0). Assume this investment is fully tax-deductible, as stipulated by the new US corporate tax code of 2018. |
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- This company has current pre-tax profits from other projects that are greater than $600, so it can take full advantage of the investment tax break above in year 0. |
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- The machine will generate operating profits before |
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- Depreciation is not tax-deductible. Notice that you do not need to calculate depreciation at all to solve this problem since it has no effect on taxes. |
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- The tax rate is 21% |
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- There is no salvage value at the end of the five years (the machine is worthless), and no required |
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Compute the NPV of the project if the discount rate is 9%. |
Initial cost after tax = $600 * (1-tax rate )
=$600 * (1-21%)
=474
After tax profit for 5 years starting from year 1 = $312 * (1- tax rate )
=312 * (1-21%)
=246.48
We know
NPV = present value of inflow – present value of outflow
=246.48 * present value annuity factor (9% , 5 periods) - 600
Should we consider 600 as
Refer present value annuity table for factor value
=246.48 * 3.88965 – 600
=958.72 – 600
=358.72
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