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

Annual depreciation = (cost of asset – salvage value)/ Life of asset

                                         = (1,000,000 -100,000) x 10

                                         = 90,000

Taxable income = increase in revenue – inc cost – annual depreciation

                                = 600,000 -200,000 -90,000

                                =310,000

Tax = taxable income x tax rate

        = 310,000 x 40%

        = 124,000

After tax cash flow = taxable income – tax + depreciation

                                      = 310,000 -124,000 +90,000

                                      = 276,000

Future value of after tax cash flow = PV x (1+r)^n

                                                                      =276,000 x (1+0.06)^10

                                                                      = 494,273.96

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