Farmington Enterprises wishes to estimate the after Tax future worth of the foll

Question

Farmington Enterprises wishes to estimate the after Tax future worth of the following investment. It will use SNL (straight line) depreciation to estimate its depreciation. Interest rate will be I = 6%, income tax rate will be 40%. Initial cost of new machinery to be considered is 1,000,000. Salvage Value after 10 years is 100,000. Cash flow is increased revenue 600,000 but with increased operating and maintenance expenses of 200,000 for each year (uniformly). Analyze the problem showing yearly depreciation, Taxable Income, Taxes and After Tax Cash Flow as well as the future value for the system at t= 10 years.

Explanation / Answer

Future Worth Analysis Year Investment Increased revenue less O&M expenses Salvage   Depreciation Taxable Income Tax @40% Post Tax Income Add back depreciation Net Cash Flow Compounding factor @6% Future Worth=Net Cash flow*compunding factor Year 0    (1,000,000) (1,000,000)      1.7908 (1,790,848) Year 1       400,000    (100,000) 300,000         (120,000)       180,000     100,000         280,000      1.6895         473,054 Year 2       400,000    (100,000) 300,000         (120,000)       180,000     100,000         280,000      1.5938         446,277 Year 3       400,000    (100,000) 300,000         (120,000)       180,000     100,000         280,000      1.5036         421,016 Year 4       400,000    (100,000) 300,000         (120,000)       180,000     100,000         280,000      1.4185         397,185 Year 5       400,000    (100,000) 300,000         (120,000)       180,000     100,000         280,000      1.3382         374,703 Year 6       400,000    (100,000) 300,000         (120,000)       180,000     100,000         280,000      1.2625         353,494 Year 7       400,000    (100,000) 300,000         (120,000)       180,000     100,000         280,000      1.1910         333,484 Year 8       400,000    (100,000) 300,000         (120,000)       180,000     100,000         280,000      1.1236         314,608 Year 9       400,000    (100,000) 300,000         (120,000)       180,000     100,000         280,000      1.0600         296,800 Year 10       400,000     100,000    (100,000) 400,000         (160,000)       240,000     100,000         340,000      1.0000         340,000     1,959,775 FV of the system at t=10=      1,959,775

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