7-22. A company is considering the purchase of a capital asset for $100,000. Installation charges needed to make the asset for serviceable will total $30,000. The asset will be depreciated over six years using the straight-line method and an estimated salvage value (SV6) of $10,000. The asset will be kept in service for six years, after which it will be sold for $20,000. During its useful life, it is estimated that the asset will produce annual revenues of $30,000. Operating and maintenance (O&M) costs are estimated to be $6,000 in the first year. These O&M costs are projected to increase by $1,000 per year each year thereafter. The after-tax MARR is 12% and the effective tax rate is 40%. a. Use the tabular format given in Figure 7-5 to compute the after-tax cash flows.
Year-0 | Year-1 | Year-2 | Year-3 | Year-4 | Year-5 | Year-6 | |||
Annual sales | 30000 | 30000 | 30000 | 30000 | 30000 | 30000 | |||
Less: Operating cost | -6000 | -7000 | -8000 | -9000 | -10000 | -11000 | |||
Less: Depreciation (130000-10000)/6 | -20000 | -20000 | -20000 | -20000 | -20000 | -20000 | |||
Net income before tax | 4000 | 3000 | 2000 | 1000 | 0 | -1000 | |||
Less: Tax @ 40% | -1600 | -1200 | -800 | -400 | 0 | 0 | |||
Net icnome after tax | 2400 | 1800 | 1200 | 600 | 0 | -1000 | |||
Add: Dep | 20000 | 20000 | 20000 | 20000 | 20000 | 20000 | |||
Annual cash flows | 22400 | 21800 | 21200 | 20600 | 20000 | 19000 | |||
Initial Investment | -130000 | ||||||||
Salvage value | 10000 | ||||||||
After tax cash flows | -130000 | 22400 | 21800 | 221200 | 20600 | 20000 | 29000 | ||
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