Purchase price of a new machine is $84000 and the useful life of the machine is 6 years

Purchase price of a new machine is $84000 and the useful life of the machine is 6 years. At the end of 6 years salvage value of the machine is zero. Before tax earnings from the new machine is $18000 per year. The effective income tax rate is 40% and after tax MARR is 12% using the SL depreciation, show the before-tax and after-tax cash flows in a table and calculate after-tax IRR value for this investment. Is this a good investment?

Expert Solution

Since annual earning is $18000, before tax cash flow = $18000

Annual Depreciation = Cost/ Useful Life = 84000/6 = $14000

Net Profit Before Tax = Earnings - Depreciation = 18000-14000=$4000

Tax =40%*4000=$1600

Profit After Tax = Profit Before Tax - Tax =4000-1600 = $2400

After tax cash flow = Profit after tax + depreciation = 2400+14000=$16400

Hence cashflows can be tabulated as below:

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Before Tax cash flows	-84000	18000	18000	18000	18000	18000	18000
After Tax cash flows	-84000	16400	16400	16400	16400	16400	16400

Since after tax IRR is 4.72% which is less than MARR of 12%, it is not a good investment

Rahul Sunny answered 2 years ago

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