Question

7-22. A company is considering the purchase of a capital asset for $100,000. Installation charges needed...

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.

Homework Answers

Answer #1
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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