Question

A rm is contemplating a new, mechanized welding system to replace its current manual system. It costs $600,000 to get thenew 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 from year 1-4?

Answer 1

The cashflow calculation is as hown below

Year	0	1	2	3	4
Cost of Machine	-600000	0	0	0	0
Salvage Value	0	0	0	0	100000
Cost Saving	0	180000	180000	180000	180000
Depreciation	0	180000.00	126000	88200	61740
Profit Before Tax	0	0.00	54000.00	91800.00	118260.00
Less Tax @44%	0	0.00	23760.00	40392.00	52034.40
Profit After Tax	0	0.00	30240.00	51408.00	66225.60
Add Depreciation	0	180000.00	126000.00	88200.00	61740.00
Cashflows	-600000	180000.00	156240.00	139608.00	227965.60

Here, we can see the Cashflows from year 1 - year 4

as Year 1 = $180,000,

Year 2 = $156,240

Year 3 = $139,608

Year 4 = $227,965.60 (After Adding depreciation as well as Salvage value to PAT, Salvage value is non taxable as total depreciation is below $500,000)