Using an MACRS depreciation schedule having a class life of 5 yr, (a) Compute the cash flows. (b) At an effective interest rate of 20%, determine the net present value. (c) Is the investor’s rate of return less than or greater than 20%? Explain. (d) Compute the investor’s rate of return.

Straight-Line

Depreciation  MACRS

Depreciati

Year 1  $10,000      $20,000  

Year 2    20,000        32,000  

Year 3    20,000        19,200  

Year 4    20,000        11,520  

Year 5    20,000        11,520  

Year 6    10,000        5,760  

Totals  $100,000      $100,000  

Compute the net present value of the investment if MACRS depreciation is used. Use 10% as the discount rate.

Net income after tax  depreciation  Net Cas flow

(1)                                                   (2)           (3)=(1)+(2)

$100,000

                                                $100,000

$32,240.00    $20,000.00       $52,240.00

$24,800.00    $32,000.00  $56,800.00

$32,736.00    $19,200.00  $51,936.00

$37,497.00    $11,520.00  $49,017.60

$37,497.00    $11,520.00  $49,017.60

$41,068.00    $5,760.00        $49,017.60

Compute the net present value:

Year  Net cas flow  [email protected]%         Present Value

 (1)    (2)                    (3)=(1)x(2)

0  $100,000.00  1    $100,000

1  $52,240.00  0.909    $47,486.16

2  $56,800.00  0.826    46,916.80

3  $51,936.00  0.751    $39,003.94

4  $49,017.60  0.683    $33,479.02

5  $49,017.60  0.621    $30,439.33

6  $46,828.80  0.564    $26,411.44

                NPV            $123,739.29

Explanation:

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