NPV
Tax Example
ABC & Company planning
to start a project. Initial investment for the project is $ 30,000 annual
profit is executed $ 12,000 for Three year. Machinery was purchased costing $ 30,000
and is to be depreciated 40% (Reducing balance method). Disposal value of machinery
is $ 8000. Cost of capital is 12%. Tax rate is 40%. Calculate the NPV
Solution
1. Calculate Tax relief on Depreciation
|
Particulars
|
Depreciation & Reducing Balance
|
Tax Relief 40% @
Depreciation
|
|
Year 1
|
$ 30,000
|
|
|
Less: Depreciation
|
$ 12,000
|
4800
|
|
Balance Year 1
|
$ 18,000
|
|
|
Less :Depreciation
|
$ 7,200
|
2880
|
|
Balance Year 2
|
$ 10,800
|
|
|
Less: Deprecation
|
$ 10,800
|
4320
|
|
Year 3
|
$ Nil
|
|
|
|
|
|
2. Net Cash Flow
Tax relief on depreciation
and tax payable will affect the coming next year because tax is being paid in arrears.
|
Particulars
|
Year 0
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
|
Profit
|
|
12,000
|
12,000
|
12,000
|
|
|
Tax
payable
|
|
|
(4,800)
|
(4,800)
|
(4,800)
|
|
Investment
|
($30,000)
|
|
|
|
|
|
Residual
Value
|
|
|
|
$
8,000
|
|
|
Tax
Relief
|
|
|
4,800
|
2,880
|
4,320
|
|
Net
Cash
|
(
30,000)
|
12,000
|
12,000
|
18,080
|
480
|
3. Calculate NPV
|
|
Year 0
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
NPV
|
|
Net
Cash
|
(
30,000)
|
12,000
|
12,000
|
18,080
|
480
|
|
|
Discount
Factor
|
|
(1+.12)-1
|
(1+.12)-2
|
(1+.12)-3
|
(1+.12)-4
|
|
|
|
(30,000)
|
10,714
|
9566
|
12,868
|
305
|
+3453
|
