Use an effective tax rate of 32% to determine three parameters: CFAT, NOPAT, and PW of taxes (i = 6% per year) associated with a new-technology MRI machine (first cost of $30,000) recently located at the county-government-funded Zendra Hospital in San Francisco. Analyze two different depreciation scenarios: (1) uniform write-off of $6000 per year, and (2) accelerated depreciation of $6000, $9600, $5760, and $3456 in years 1 through 4, respectively. Which one is the better depreciation schedule using the criteria (a) total NOPAT, and (b) PW of taxes? (All cash amounts are in $1000 units.)

Question

Answer 1

All monetary terms are in $1000 units

CFAT = GI - OE - P + S - Taxes

NOPAT = TI - Taxes



Scenario 1: Uniform write-off

Sample for year 2: CFAT = 15 – 4 – [(15 – 4 - 6)(0.32)] = 9.40

NOPAT = 5 – 1.6 = 3.40



(b) PWtax = 0.448(P/F,6%,2) + 1.037(P/F,6%,3) + 0.494(P/F,6%.4)

= $1.6607 ($1661)



Conclusion: A larger NOPAT and lower PWtax are better economically. Scenario 1 (uniform depreciation) is the choice for the NOPAT measure; however, scenario 2 (accelerated depreciation) is the choice for the PWtax criterion.