The Municipal Refuse Collection Vehicle (MRCV) has an initial purchase price of P84,000 and an estimated useful life of 6 years. During this period, the Salvage Value (SV) and Book Value (BV) are both assumed to be zero at the end of the asset’s useful life. Each year, before-tax cash flow is expected to be +P18,000 for a total of +P108,000 over its 6 year lifespan.
To determine the present worth of this investment opportunity, we will use straight-line depreciation, an effective tax rate of 40%, and an after-tax MARR (minimum acceptable rate of return) of 12%. The initial cost is divided into six equal parts where each part is depreciated on a proportional basis every year. Through straight line depreciation method:
Purchase Price – 84,000
Depreciation Per Year – 14000 [84K/6]
Taxable Income Per Year – 8400 [14K X 0.4]
After Tax Cash Flow per Year – 5040 [(14K – 8400) X 0.6]
Total After Tax Cash Flow = 30240 [5040 x 6year]
Use straight-line (SL) depreciation, an effective income tax rate of 40% and an after-tax MARR of 12% to determine the present worth of the investment.
Now calculate Present Worth Factor using MWR 12%: PWFactor = 4.12945722062 {1/(1+12/100)}^n n=no .of years(in this case it’s 6years).
Present Worth (PW)= BTCF X PWFactor PW = 30240 x 4.12945722062 PW = 123708.6816
It implies that for a municipal refuse collection vehicle with a purchase price of P84,000 over 6 years with BTCF +P18,000 annually at 40% tax rate with the minimum desired rate return being 12%, the present worth is P123709 approximately after considering all expenses including taxes.