Problem
An investor is purchasing a car repair facility with an initial cost of $90M. The facility will have before tax profit of $25M/Yr the first two years and $30M/Yr in years 3,4, and 5. At the end of year 5, it has to be disposed of at a cost of $10M with no resale value. The investor is using a straight-line depreciation method with an assumed life of 10 years and a resale value of $5M for depreciation purposes. He has a combined federal and state tax rate of 45%. His cost of money is 10%.
a-What is the net present worth of this operation?
b-Would he be better off using a DDB method of depreciation with the same assumptions?