ABC Company can borrow money for capital improvements 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 textbook tables, calculate the Net Present Value of this Investment (pre-tax basis).

(b) Using EXCEL's 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)?

Table A-3 Present Value Interest Factors for One Dollar Discounted at k Percent for n Periods: PVIF.= 1 / (1 + k) " Forlod 1% 3% 5% 6% TH 8% 9% 10% 11% 12% 13% 14% 20% 25% 09901 0.9804 0.9709 09516 0.9524 0.9434 019346 09269 0.9174 0.9091 0.9009 0.8923 0.BT72 0.8696 0.8621 0.8000 0.7692 0.9812 0.9426 0 9246 0 8900 0.B724 18673 0.8417 0.8264 0.8116 0.7972 0.7831 0.7695 0.7561 1.7412 0.6944 0.6504 0.6400 0.5917 0.9706 0.9423 0.9151 08 890 0.8638 18396 0.8161 0.7722 0.7613 0.7312 0.7118 16931 0.6750 16675 0.6407 06787 0.5245 0.6120 0.4552 0.9610 D.9238 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6587 0.6355 0.6133 0.5921 0.5718 0.5523 04823 D.4230 0.4096 0.3501 0.9615 0.9057 0.8626 0 8219 1.7835 0.7473 0.7130 16806 0.6489 0.6209 015935 0.5674 0.5428 0.5194 0.4972 0.4761 04019 0.3411 0.3277 0.2693 6 0.9420 0.8375 0.7903 1.7462 0.7060 0.6653 0 6302 0.59 53 0.5645 D.5346 0.5065 0.4803 0.4556 0.4323 0.4104 0 3349 0.2751 0.2621 0.2072 0.8131 D.759 1.7107 016651 0.6227 5835 1.5470 0.613 D.4817 1.4521 0.4261 1.3995 0.351 0.2791 0.2218 0.209 D.1594 0.9235 0.8535 1.7894 0.7307 0.6768 0.6274 0.5820 0 5403 0.5019 0.4665 D.4339 0.4039 0.3767 0.3506 1-3265 0.3050 2326 0.1789 0.1678 0.1226 0.9143 0.7664 0.7026 116446 0.5919 1.5439 0.5003 1.4604 0.4241 0.3909 0.3605 0 3129 1.3075 0.2843 1.2630 -1938 0.1443 0.1342 0.0943 0.9053 D.8203 0.7441 0.6139 D.5684 0.5083 0.4632 0.4224 0.3855 D.3522 0.3220 0 2046 0.2697 0 2472 0.2257 0.1615 D.1164 0.1074 0.0725 11 1 8963 0.8043 0.7224 0.6496 0.5847 15268 1.4751 14289 0.3875 0.3505 0.3173 0.2875 0 2607 1.2356 0.2149 0.1954 21346 0.0938 20859 0.0568 12 D.78 85 0.7014 06246 0.5568 0 4970 0.4440 0.3556 0.3186 0.2858 0.2567 0 2107 0.2076 0.1869 0.1685 0-1122 0.07 57 0.068T 0.0429 13 0.8787 D.7730 0.6810 0.5303 0.4688 1.4150 0.3677 0.3262 0.2897 0.2576 0.2292 0 2042 0.1821 0-1625 1.1452 0.0935 0.0310 0.0550 D.0330 14 0 8700 0.7579 0.6611 D.5776 0.505 D.4423 1.3878 0.3405 0.2892 0.2632 0.2320 0.2045 0.1807 0.1 597 2-1413 0.1252 10779 D.D492 0.0440 0.0264 15 0 8613 0.7430 0.6419 0.5563 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.2090 0.1827 0.1599 0.1401 0.1229 0.1079 0.0649 0.0397 0.0352 0.0195 16 0 8528 0.7284 1.6232 0 5339 0.4581 0.3387 0.2919 0.2519 0.2176 0.1883 0.1631 0.1416 0.1220 0-1069 010930 0.054 D.D320 0.0281 0.0150 17 8444 0.7142 0.6050 0.5134 1.4363 0.3714 1.316E 0 2703 0.2311 .1978 0.1696 1.1456 0.1262 1.1078 0.0925 1.0802 20451 0.0253 0.0225 0.0116 15 09EB 0.70 02 0.6874 0.4155 0.3503 0.2959 12602 0.2120 0.179 D.152 0.1300 0.1108 010946 010631 D.D208 20180 0.0089 19 0 8277 0.6703 0.4746 1.3957 0 2305 0.2785 0.2317 0.1945 0.1635 0.1377 0.1161 0.0820 0 0703 01053 5 0.0313 D.0168 0.0144 0.0 068 0.8195 0.67 30 0.6537 0.4564 0.3763 131 18 0.2584 0.2145 0.1784 0.1486 0.1240 0.1037 DO868 0.D728 0.0514 0 0261 D.0135 0.0115 D.0053 21 28114 0.6598 0.6375 BBCTO 0.3583 D 2942 0.2415 0-1987 0.1637 2.1351 0.1117 0.0926 0 0768 0.0638 0.0531 010443 0.0217 0.0109 0.0092 22 0.0040 08034 0.6-468 0.6219 0.4220 1.3418 1 2775 0.2257 L1839 1.1502 0.1228 0.1007 0.0826 0.0462 1.0382 10181 D.DO88 2.0074 0.0 031 0.7954 0.6342 0.6067 D.4067 0.3256 D 26 18 0.2106 0-1703 0.1378 0.1117 D.0907 0.0738 010491 0 0402 010326 0 0151 0.0071 0.0059 D.0024 24 0 7876 0.6217 0.4919 0.3901 0.3101 0 2470 0.1971 D.1677 0.1264 0.1015 0.0817 0.0653 10532 010431 0.0349 010284 10 126 0.0057 0.0047 0.0018 25 0.7798 OATTE 0.3761 0.2953 D 2330 0.1 842 0.1460 0.1160 12600 0.0736 0.05BE 0 0471 010378 0.0304 010245 0 0105 0.0046 0.0038 D.0014 30 0.7419 0.552 0.4120 EBOC O 0.2314 0.1741 0.1314 20994 DO673 D.0437 1.0334 L0256 010195 0.0161 0.0116 0 0042 D.DO16 0.0012 35 0.7059 D.5000 0.3554 D 2534 0.1813 0.1301 010937 10676 0.0490 0.0356 0.0269 0.01 83 0.0139 010102 0.0075 010055 0.0017 0.DOOG 0.6989 0.4902 0.3450 0 2437 0.1727 0.1227 010875 0 0626 010449 0.0323 0.0234 0.01 69 0 0123 0.DOBE 0.0065 010048 0.0014 40 0.6717 0.4529 1.3065 0 2083 0.1420 0.0972 0 0460 0.0318 0.0221 0.0164 0.0107 DOOTE 010053 010026 0.0007 0.3715 0.2281 0.1407 0 0543 010339 0 0213 0.0134 0.0085 0.0 054 010035 010014 0.0009B C K Worksheet for Module 6 (Problems 1 & 3) I Problem 1: PRE-TAX ANALYSIS (Cash Flow) YEAR: 0 1 2 3 4 5 6 7 8 9 10 Buy Equip Annual Savings) 6 Salvage Value Depreciation 8 TOTAL Rate: PV (using table) PV (using NPR function) Cash Out Annual Savings Salvage Value Net PV: IRR Problem 3: AFTER-TAX ANALYSIS YEAR: 1 2 3 4 5 6 7 8 9 10 9 Buy Equip 20 Annual Savings) Salvage Value Depreciation TOTAL After-tax Logic on Expenses : The investment saves money. It lowers cash outflow AND lowers deductible expenses 15 When I lose the ability to claim expenses, taxable income goes up, so I pay more takes. 26 Rate: PV (using table) PV (using NPR function) 27 Cash Out 28 Annual Savings 29 Salvage Value Annual Depr. 30 Tax Benefit 32 Net PV 33 IRR 34Table A-4 Present Value Interest Factors for a One-Dollar Annuity Discounted at k Percent for n Periods: PVIFA = [1 - 1/(1 + k)"] / k Perlod 3% 5% 10% 11% 12% 13% 14% 15% 16% 20% 24% 25% 0 9901 0.9804 0.9709 09515 0.9524 0 9434 019346 0.925 0.9174 0.9091 0.9009 0.8923 0.8 850 1.8772 0.8696 0.8621 08333 0.7692 1.9704 1.9416 1.9135 18861 1.8594 18334 1 7833 1.7591 1.7355 17125 1.6901 1.8681 1.6467 3 1 6257 1.6052 1 5278 1.4568 1.440D 2 9410 1.3609 2.8839 2.8286 2.7751 2.7232 2 6730 2.6243 2 6771 2.5313 2.4869 2.4437 2.4018 2.3612 2.3216 2 2832 2.2459 2.1065 1.9813 1.9520 4 1.8161 3.9020 3.8077 17171 3.6299 3.5460 3.4651 3.3872 3.3121 1.2387 1.1699 3.1024 3.0371 2 9745 219137 2 8560 2.7982 2 5887 2.4043 2.3616 2.1662 1.8634 4.7136 4.6797 4.4518 4.3295 4 2124 4.1 DOE 1.8897 3.7908 8.5959 3.6048 3.5172 3.433 1 3522 3.2741 9066 2 2.7454 2.6893 2.4356 6 5.7955 5.6014 5.4172 5 2421 BID757 49173 1.7685 4 6229 1.4859 4.3653 4.2306 4.1114 3.9976 3.8887 1.7845 3.6847 3.3255 3.0206 29514 2.6427 3.7282 6.4720 6.2303 6.002 1 6.7864 5 5924 5.2064 510320 4.8684 4.7122 4.5638 4.4226 4.2883 4.1604 4.0380 3.6046 3.2423 3.1611 B 2.8021 7.6517 7.3256 7.0197 6.7327 6.4632 6 2098 5.9713 5.7466 5.5348 5.3349 5.1461 4.9675 4.7908 416386 4.4873 4.3436 ZIEBY 3.4212 1.3289 2.9247 3.5661 B. 1522 7.786 7-4353 7.1078 6.5152 6.2465 5.99 52 5.7590 5.5370 5.3282 5.1317 4.9484 4.7718 4.6035 4 0310 3.5856 3.4631 9.4713 3.0190 8.9826 8.5302 B.1109 7.7217 7 3601 7.0216 57101 6.4177 3.1446 5.8 892 5.6502 5.4262 5.2161 50188 4.8312 4.1925 3.6819 3.5705 3.0916 11 10.368 9.7858 B.7606 1.3064 7 8869 7.4987 7-1390 6.4951 6.2065 5.9377 5.6869 5.4527 5 2337 510286 4.3271 3.7757 3.6564 3.1473 11.255 10 576 9.9540 8.8633 7.9427 7 5361 7.1607 B.8-137 6.4924 6.1944 5.9176 516603 5.4206 5.1971 4.4392 3.8514 1.7251 3.1903 13 12.134 11.248 10.635 19856 9.3935 18627 1.3577 7 9038 7.4859 7.1034 6.7495 14235 6.1218 5.B424 LEGS 5.3421 4 5327 14 3.9124 1.7801 3.2233 13.004 12.106 11.295 101563 9.8986 2950 1.7455 8.2442 7.7852 7.3667 6.9819 6.6282 6.3025 610021 15 5.7245 5.4675 16106 3.9516 3.8241 3.2487 13.865 12 849 11.938 1.118 10.380 9.7122 9.1079 8.6595 1.0507 7.6061 7.1809 6.81 09 6.4624 6.1422 5.8474 5.5755 4 6755 4.0013 3.8593 3.2682 14.718 13 578 12.561 11 652 10.838 10-106 9.4486 8 8614 8.3126 7.8237 7.3792 6.97-40 6.6039 6.2651 5.9642 17 616685 4.7296 4.0133 3.8874 15.562 3.2832 14 292 13.165 12.166 11.274 1.7612 3.1216 8.5436 3.0216 7.5488 7.1195 6.7291 1.3729 5.0472 17746 4.0591 19099 3.2948 16.398 14.992 13.754 12.659 11.690 10 828 10.059 8.3719 8.2014 7.7016 7.2497 6.8399 6.4674 6.1280 5.8178 4 8122 4.0799 3.9279 19 3.3037 17.226 15.678 14.324 13.134 12.085 11.158 ID.3VE 9.6036 1.9501 8.3649 7.839 7.365 5.5504 6.1982 B.BT7E 4 8435 4.09 57 3.9424 3.3106 20 18.046 16.351 14.877 13 590 12.462 11.470 10.594 3.8181 9.1285 8.6136 7.9633 7.4694 7.0248 6.6231 519285 4 8696 4.1103 3.9539 3.3158 21 18.857 17011 15.415 14 029 12.821 11.764 10.836 10.017 .2972 3.6487 8.0761 7.5620 7.1016 16870 3125 5.9731 4.8913 4.1212 3.9631 22 19.660 17 859 15.937 14.461 13.163 12 042 11.051 10.201 9.4424 8.7715 8.1757 7.6446 7.1695 1.7429 53587 6.0112 4.9094 4.1200 3.9705 23 3.3230 20.456 16.444 14 867 13.489 12 303 11.272 10.371 3.5802 8.8832 3.2564 7.7184 7 2297 1.7921 6.0442 4.9245 4.1371 1.9764 24 21.243 18914 3.3254 16.936 15 247 13.793 12 560 11.459 10.629 3.9847 7.7843 7 2829 6.8351 34338 BIDTZE 4.1428 3.981 1 25 3.3272 22.023 19 523 17.413 15 622 14.094 12 783 11.654 10.675 9.8226 9.0770 8.4217 7.8431 7.3200 3 4641 610971 4.9476 4.1474 1.9849 3.3.286 30 25.808 22.396 19.600 17 292 15.372 13 765 12.406 11.258 10.274 9.4269 8.5938 8.0552 7.4967 7.0027 515660 6.1772 4.9789 4.1601 3.9950 35 3.3321 29.409 24.909 21.487 18.665 16.374 14.498 12.940 11.655 10.567 9.6442 8.8562 3.1755 7.5856 7.0700 6.2153 19915 4.1644 3.9984 3.3330 36 10.108 25 489 21.832 18 908 16.547 14 621 13.035 11.717 10.612 9.676 8.8786 8. 1924 7.5979 7.0780 5.6231 6.2201 4.9929 4.1649 3.9987 3.3331 40 32.835 27 356 23.115 19 793 17.159 15 046 13.312 11.925 10.757 9.7791 8.9511 8.2438 7.6344 7.1050 6.6418 6.2335 4.9966 4.1859 56657 39.196 31.424 3.3132 25.730 21.482 18.256 15 762 13.801 12 233 10.9 62 3.9148 9.0417 8.3045 7.6762 7.1327 6.6605 6.2463 4.9995 4.1656 3.9999 3.3233