Question

Builtrite is considering purchasing a new machine that would cost $60,000 and the machine would be depreciated (straight line) down to $0 over its five year life. At the end of five years it is believed that the machine could be sold for $15,000. The current machine being used was purchased 3 years ago at a cost of $40,000 and it is being depreciated down to zero over its 5 year life. The current machine's salvage value now is $10,000. The new machine would increase EBDT by $42,000 annually. Builtrite’s marginal tax rate is 34%. What the RATFCF’s associated with the purchase of this machine?

Answer 1

RATFCF is $30,780

Compute Depreciation
Cost of Machine	$        45,000
Life in Years	5
Annual Depreciation	$    9,000.00
(Cost/Life)
Compute RATFCF:
EBDT	$        42,000
Less Depreciation	$          9,000
EBT
Earnings Before Tax	$        33,000
Less: Tax @ 34%	$        11,220
EAT
Earnings After Tax	$        21,780
Add: Depreciation	$          9,000
RATFCF	$        30,780