Question

AFTER TAX CASH FLOW

Initial investment in the asset $80,000
Annual revenues $50,000
Annual expenses $20,000
Duration 6 years.
Since the asset was in very good condition, it was sold ate the end of the 6 th year in $35,000 instead of $20,000.

Calculate the After Tax Cash Flow and After Tax NPV for this project, using a tax rate of 30%, an after tax MARR of 12% per year

Answer 1

First we calculate depreciation per year.

Asset price = 80,000

Salvage value = 20,000

years = 6

Depreciation per year = (Purchase price - salvage value) / life in years = (80000 - 20,000) / 6 = 10,000 per year

Calculation of the After tax operating cash flows per year :-

particulars	year 1 to 6
Revenue	50,000
Less-Expenses	20,000
Less-Depreciation	10,000
Profit before tax	20,000
less-Tax@30%	6000
Profit after tax	14,000
Add-Depreciation	10,000
Operating cash flows per year	24,000

Calculation of the after tax sale proceeds from asset-;

Book value of asset at end of year 6 = Salvage value = $ 20,000

Sale value of machine = 35,000

Sales	35,000
less-Book value	20,000
Gain on sale	15,000
Tax on gain@30%	4500
After tax sale proceeds from asset	30,500

Calculation of the after tax cash flows :-

years	Operating cash flows	After tax sale proceeds from asset	After tax cash flows
1	24,000		24,000
2	24,000		24,000
3	24,000		24,000
4	24,000		24,000
5	24,000		24,000
6	24,000	30,500	54,500

Calculation of the NPV :-

years	cash flows	PVF@12%	PV of cash flows
0	($80,000)	1	($80,000.0000000000)
1	24,000	0.892857	$21,428.5714285714
2	24,000	0.797194	$19,132.6530612245
3	24,000	0.71178	$17,082.7259475218
4	24,000	0.635518	$15,252.4338817159
5	24,000	0.567427	$13,618.2445372464
6	54,500	0.506631	$27,611.3961041640
NPV	$34,126.0249604441
NPV	34,126.02