Use the table for the question(s)below.
-Visby Rides,a livery car company,is considering buying some new luxury cars.After extensive research,they come up with the above estimates of free cash flow from this project.The depreciation schedule shown is for three-year,straight-line depreciation.By how much would the net present value (NPV)of this project be increased,if the cars were depreciated by the MACRS schedule shown below given that the cost of capital is 10%?
A)$8,342
B)$9,083
C)$10,112
D)$25,912

Question

Use the table for the question(s)below. 
-Visby Rides,a livery car company,is considering buying some new luxury cars.After extensive research,they come up with the above estimates of free cash flow from this project.The depreciation schedule shown is for three-year,straight-line depreciation.By how much would the net present value (NPV)of this project be increased,if the cars were depreciated by the MACRS schedule shown below given that the cost of capital is 10%? 
A)$8,342 
B)$9,083 
C)$10,112 
D)$25,912

Quizplus · Accepted Answer

Using straight-line depreciation, the initial investment is $212,000 and the total cash flows over three years are $63,000, $127,000, and $127,000. The NPV using a 10% cost of capital is:
NPV = -$212,000 + ($63,000/(1.1)^1) + ($127,000/(1.1)^2) + ($127,000/(1.1)^3) = $9,083.34

Using MACRS depreciation, the depreciation schedule for a $212,000 asset is:
Year 1: $127,200 (60%)
Year 2: $50,880 (24%)
Year 3: $30,528 (14.4%)
Year 4: $3,392 (1.6%)

The taxable income in each year would be reduced by the corresponding amount of depreciation, resulting in lower taxes. This would increase the cash flows in each year by the corresponding amount of tax savings. The after-tax cash flows would be:
Year 1: $71,304 ($63,000 + $56,880*0.35)
Year 2: $136,164 ($127,000 + $49,104*0.35)
Year 3: $137,016 ($127,000 + $29,928*0.35)

The NPV using a 10% cost of capital is:
NPV = -$212,000 + ($71,304/(1.1)^1) + ($136,164/(1.1)^2) + ($137,016/(1.1)^3) = $18,166.13

The increase in NPV from using MACRS depreciation instead of straight-line depreciation is:
$18,166.13 - $9,083.34 = $9,082.79, which is closest to answer choice B.

Use the Table for the Question(s)below