Question

A firm is contemplating a new, mechanized welding sys- tem to replace its current manual system. It costs $600,000 to get the new system. The cost will be depreciated at a 30 percent CCA rate. Its expected life is four years. The system would actually be worth $100,000 at the end of fours years. The management thinks the new system could save $180,000 per year pre-tax in labour costs. The tax rate is 44 percent and the required return is 15 percent.

Calculate the total cash flows year 1–4?

Answer 1

Year	Opening WDV	CCA Rate [Half for 1st year]	Depreciation [Opening*CCA Rate]	Closing WDV [Opening-Depreciation)]
1	600000	0.15	90000	510000
2	510000	0.3	153000	357000
3	357000	0.3	107100	249900
4	249900	0.3	74970	174930

After Tax Salvage Value = [WDV at the end of 4th year-Salvage Value]*[1-Tax Rate] = [174930-100000]*[1-0.44] = 74930*0.56 = $41960.8

	Year 1	Year 2	Year 3	Year 4
Labour Savings	180000	180000	180000	180000
Less: Depreciation	90000	153000	107100	74970
Profit Before Tax	90000	27000	72900	105030
Less: Tax@44%	39600	11880	32076	46213.2
Profit After Tax	50400	15120	40824	58816.8
Add: Depreciation	90000	153000	107100	74970
Operating Cash Flow	140400	168120	147924	133786.8
Add: After Tax Salavage Value	0	0	0	41960.8
Total Cash Flow	140400	168120	147924	175747.6