Question

An​ auto-part manufacturing company is considering the purchase of an industrial robot to do spot​ welding, which is currently done by skilled labor. The initial cost of the robot is ​$300 comma 000​, and the annual labor savings are projected to be ​$150 comma 000. If​ purchased, the robot will be depreciated under MACRS as a​ seven-year recovery property. This robot will be used for five years after which the firm expects to sell it for ​$70 comma 000. The​ company's marginal tax rate is 25​% over the project period. Suppose that the project requires a ​$50 comma 000 investment in working capital at the beginning of the project and the entire amount will be recovered at the end of project life. Determine the net​ after-tax cash flows for each period over the project life. Assume MARRequals12​%. Fill in the table below. ​(Round to the nearest​ dollar.) Period Net​ After-Tax Cash Flow each year 0 ​1 2 3 4 5

Answer 1

Cash flow is the net incoming and outgoing of cash during a given period.

it does not consider non cash expenses like depreciation. However depreciation saves tax so tax saved by depreciation is cash inflow.

Year 0 = Initial investment+working capital

=$300,000+$50,000

= -$350,000

	Year 0	2	3	4	5
after tax labor cost savings Labor cost(1-t)	$112,500[$150,000[(1-0.25)	$112,500	$112,500	$112,500	$112,500
Depreciation tax sheild depreciation*t	$10,717.5[$300,000*14.29%]*25%	$18,367.5[$300,000*24.49%]*25%	$13,117.5[$300,000*17.49%]*25%	$9,367.5‬[$300,000*12.49%]*25%	$6,697.5[$300,000*8.93%]*25%
after tax salvage cash inflows					$69,232.5
workin capital freed up					$50,000
Net cash flows	$123,218	$130,868	$125,618	$121,868	$238,430

After tax salvage = Salvage value-tax on gain

Book value= cost-depreciation upto 5th years

=$300,000-$233,070 [$300,000* [14.29+24.49+17.49+12.49+8.93]%

=$66,930

Gain = sales value-book value

=$70,000-$66,930

=$3,070

tax on gain = $3,070*25%

=$767.5

After tax salvage = $70,000-$767.5

=$69,232.5

cash flows (I have rounded it to nearest dollar)

Year	After tax net cash flows
0	-$350,000
1	$123,218
2	$130,868
3	$125,618
4	$121,868
5	$238,430

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