Hogvertz Elvin Catering (HEC) is considering switching from its old food maker t

Question

Hogvertz Elvin Catering (HEC) is considering switching from its old food maker to a new Wonder Food Maker. Both food makers will remain useful for the next 10 years, but the new food maker will generate a depreciation expense of $5,000 per year, while the old food maker will generate a depreciation expense of $4,000 per year. What is the after-tax free cash flow effect from depreciation of switching to the new food maker for HEC if the firm’s marginal tax rate is 40 percent and the discount rate is 12 percent? (Round answer to 2 decimal places, e.g. 15.25.)

After-tax cash flow effect $______________

Explanation / Answer

Yearly affect of depreciation and amortization of cashflow = (5000-4000)*0.4 = 400

Total after-tax cash flow after depreciation effect =

Present value of annuity:

PV of annuity = P*[(1-(1+r)^(-n)) / r]

P - Periodic payment

r - rate per period

n - number of periods

PV of annuity = 400*((1-(1+0.12)^(-10)) / 0.12) = $2260.09

After-tax cash flow = $2260.09

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