ABC Company can borrow money at 6%. It is evaluating whether it should invest in a piece of machinery that will generate cash savings for the company of $30,000 per year for 10 years. At that point, the equipment will be worn out, but it can be scrapped for $20,000.00. The cost to purchase the machinery is $200,000.00, which will be a cash transaction.

(a) Using the below worksheet, calculate the Net Present Value of this Investment (pre-tax basis). (b) Using EXCELs NPV function, calculate the Net Present Value of this Investment (pre-tax basis). (c) What is the internal rate of return on this investment (pre-tax basis)?

6 7 8 9 10 Worksheet for Module 6 (Problems 1 & 3) Problem 1: PRE-TAX ANALYSIS (Cash Flow) YEAR: 0 5 Buy Equip Annual Savings Salvage Value Depreciation TOTAL PV (using table) PV (using NPR function) Rate: Cash Out Annual Savings Salvage Value Net PV: IRR: 7 8 9 Problem 3: AFTER-TAX ANALYSIS YEAR: 0 2 3 Buy Equip Annual Savings Salvage Value Depreciation TOTAL After-tax Logic on Expenses : The investment saves money. It lowers cash outflow AND lowers deductible expenses. When I lose the ability to claim expenses, taxable income goes up, so I pay more taxes. Rate: PV (using table) PV (using NPR function) Cash Out Annual Savings Salvage Value Annual Depr. Tax Benefit Net PV 6 7 8 9 10 Worksheet for Module 6 (Problems 1 & 3) Problem 1: PRE-TAX ANALYSIS (Cash Flow) YEAR: 0 5 Buy Equip Annual Savings Salvage Value Depreciation TOTAL PV (using table) PV (using NPR function) Rate: Cash Out Annual Savings Salvage Value Net PV: IRR: 7 8 9 Problem 3: AFTER-TAX ANALYSIS YEAR: 0 2 3 Buy Equip Annual Savings Salvage Value Depreciation TOTAL After-tax Logic on Expenses : The investment saves money. It lowers cash outflow AND lowers deductible expenses. When I lose the ability to claim expenses, taxable income goes up, so I pay more taxes. Rate: PV (using table) PV (using NPR function) Cash Out Annual Savings Salvage Value Annual Depr. Tax Benefit Net PV