You purchased an airplane for $500,000 and will depreciate it using a 7-year MACRS, but it will only have a 4-year life. You will finance (get a loan) for half of the $500,000, which you will repay in 4 equal annual payments. Interest rate of the loan is 12% annual rate, compounded annually. The remaining $250,000 will be financed by your company. Salvage value in year 4 of the plane is expected to be $220,000. The airplane is expected to increase revenues by $200,000 per year, however, O&M costs are expected to be $30,000 per year. Your accountants advise you that you will be required to invest $40,000 in Working Capital initially, which will be released when the project is complete. Your company is in a 21% tax bracket and your MARR is 18%.

Show the end of year cash flows for this project for years 0 through 4. What is the Net Present Worth of this investment?

3 4 Income Statement and Cash Flow Statement 0 1 2 Income statement tax rate 21% Revenues Expenses O&M Labor Material Overhead Depreciation Debt Interest Taxable income Income taxes Net income Cash Flow Statement Operating activities Net income Depreciation Investment activities Investment Salvage Gains tax Working capital Financing activities Borrowed funds Principal repayment Net Cash Flow NPV NPV(manually) IRR 3 4 Income Statement and Cash Flow Statement 0 1 2 Income statement tax rate 21% Revenues Expenses O&M Labor Material Overhead Depreciation Debt Interest Taxable income Income taxes Net income Cash Flow Statement Operating activities Net income Depreciation Investment activities Investment Salvage Gains tax Working capital Financing activities Borrowed funds Principal repayment Net Cash Flow NPV NPV(manually) IRR