Question
You are considering buying a widget at $65,000. You expect the widget would bring you a revenue of $120,000 in year 1 which would grow
You are considering buying a widget at $65,000. You expect the widget would bring you a revenue of $120,000 in year 1 which would grow at 3% annually until the end of year 10. The IRS allows following depreciation schedule on this widget: 31.2% in year 1, 20.5% in year 2, 16.5% in year 3, 11.9% in year 4, and a constant depreciation rate from year 5 to year 10. Suppose you finance the widget with a loan that charges 9.28% interest per annum, and that you will pay back this loan in the next 10 years with equal payment every year. The maintenance costs will be $5,700 per year. Your income tax rate is 33% per annum. Your cost of capital is 12% per annum.
(a) Set up the income statement and cash-flow statement for this widget. (b) Calculate the net present value of this widget.
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