Tank Ltd is considering undertaking the purchase of a new piece of equipment tha

Question

Tank Ltd is considering undertaking the purchase of a new piece of equipment that is expected to increase revenue by $12,000 each year for six years. The equipment will increase costs $4,000 each year for six years. It costs $32,000 to purchase today and for tax purposes must be depreciated down to zero over its 8 year useful life using the straight-line method. If Tank is actually forecasting a salvage (for capital budgeting purposes) of $5,000 after 6 years, what is the machine's net cash flow (after tax) for year 6? Assume the tax rate is 30%.

Explanation / Answer

Solution.

This is the machine's net cash flow (after tax) for year 6 :-

Cash flow after Tax = $44,000 from Tax point of view

Actual is as follow's

Cost of tank = $32,000 - $6,000 = $26,000

Dep. = $26,000 / 6 = $4,333

Cash flow = $48,000 - $4,333 = $43,667

Cash flow after depreciation before tax is = $43,667

Year Outflow Inflow 0                                                                                              $32,000 0 1 $4,000 $12,000 2 $8,000 $24,000 3 $12,000 $36,000 4 $16,000 $48,000 5 $20,000 $60,000 6 $24,000 $72,000 Total $72,000 - $24,000 = $48,000 less- Depreciation $4,000 Profit after dep.& before Tax $44,000 Less - Tay @ 30% $13,200 Profit after Dep. & Tax $30,800 Add - Depreciation $13,800 Cash flow after Tax $44,600

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