Question

Tank Ltd is considering undertaking the purchase of a new piece of equipment that is expected to increase pre-tax income(EBITDA) by $7,000 each year for the next 5 years. It costs $25,000 to purchase today and for tax purposes must be depreciated down zero over its 8 year useful life using the straight-line method. If Tank is actually forecasting a salvage (for capital budgeting purposes) of $8,000 after 5 years, what is the machine's net cash flow (after tax) for year 5? Assume the tax rate is 30%. NB: EBITDA is "Earnings Before Interest, Taxes, Depreciation and Amortisation"

$25,000

$14,250

$11,438

$13,838

Answer 1

Net cash flow (after tax) for year 5 = 5837.50+8412.50

= $14,250

Working Note:

Step 1: Calculation of Cashflow After Tax( CFAT) form increase in income

EBITDA		7,000
Less:	Depreciation(25000/8)	3,125
EBIT		3,875
Less:	Interest	-
EBT		3,875
Less: Income Tax @30%		1,162.50
Net Income		2,712.50
Add:	Depreciation	3,125
CFAT		5,837.50

Step 2: Calculation of CFAT from salvage

Salvage Value	8,000.00
WDV at the end of year 5	9,375.00
(25000- (3125*5))
Loss	(1,375.00)
Tax saved @30%	412.50
Total CFAT (8000+412.50)	8,412.50