Present Worth Cash Flow
Problem (Example)

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Notes


A corporation pays 48% in income tax on profits. It purchases an asset that produce a revenue stream of $5,000 for 10 years. The cost of the asset is $30,000. Annual expenses are $1500. Salvage value (at end of year 10) of the equipment is $1,200. Ignore depreciation. Use MARR 8%. What is the after tax present worth of the asset?

Given Data: (see Calculator)

Assetl Cost= $30,000
Income-Taxes= 48% (from profits)
Revenue-- Annual= $ 5,000
Expenses Annual= $1,500

Salvage @ 10 yrs= $1,200
Useful Life = 10 years
MARR (interest) = 8%

Solution:

Present worth basis Use the economic Factors:   (P/A ,i,n )  i=8%   (P/F ,i,n )  n=10 years

Analysis Procedure:

Present worth basis Calculate the following Present Worths:

1 -Revenues, Expenses, Salvage

2 -Profits = Revenues - Expenses

3 -Taxes = 0.48 * Profits

4 -Calculate: Gross Income = Revenues + Salvage

5 - Calculate Gross Expenses = Asset Cost + Expenses + Taxes

6 - Net Present Worth = Gross Income - Gross Expenses
1

Revenues=

 

$5000 * (P/A,8%,10yrs) =
5000*6.7101= 33,550.5

1

Expenses=

 

1500 *(P/A,8%,10yrs) 1500*6.7101 = 10,065.15

2

Profits =

 

33,550.5 - 10,065.15  =23,485.35

3

Taxes =

 

0.48*Profits =
 0.48*23,485.35 = 11,272.968

4

Salvage =

 

1200*(P/F,8%,10yrs) = 1200*0.4632 = 555.84

4

Gross Income=

 

33,550.5+555.84= 34,106.34

5

Gross Expenses=

30,000+10,065.15+ 11,272.968 =

51,338.118
6

Net present Worth =

34,106.34 - 51,338.118 =

(-$17,231.778)