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It is necessary to evaluate the profitability of proposed improvements to a process prior

It is necessary to evaluate the profitability of proposed improvements to a process prior

It is necessary to evaluate the profitability of proposed improvements to a process prior to obtaining approval to important changes. For one such process, the capital investment (end of year 0) for the project is $250,000. There is no salvage value. In years 1 and 2, you expect to generate an after-tax revenue of $60,000/y from the project. In years 3-8, you expect to generate an after-tax revenue of $50,000/y. Assume that the investments and cash flows are single transactions occurring at the end of the year. Assume an effective annual interest rate of 9%.

The net revenue figures were generated using a taxation rate of 45% and a straight-line depreciation over the eight-year project. Calculate the yearly net revenues if the five-year MACRS depreciation schedule were used.

Table 1. MACRS Depreciation Schedule

Year

Depreciation Allowance (% of Capital Investment)

1

20.00

2

32.00

3

19.20

4

11.52

5

11.52

6

5.76

Abhinav 04-Dec-2019

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