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Stanton inc is considering the purchase of a new machine that'll reduce before tax cash operations...

Stanton inc is considering the purchase of a new machine that'll reduce before tax cash operations cost by 5000 annually and increase sales by 10000 annually. It will use marcs method to deprecate machine and will sell machine at the end of 5th yr for 15000 before tax. Marginal rate 21% and uses 10% cost of capital . Machine has marcs class life of 5 yrs. Dep rates 20% 32% 19.2% 11.52% 11.52% and 5.76 for years 1-6. Machine cost 600000. What is after tax cash flow of new machine t=4 (cf4)? T=5 (cf5) and npv of new machine?

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Expert Solution

Statement showing Depreciation and Book valeu of a machine

Year Opening balance Depreciation Rates Depreciation
(purchase price x Depreciation rates)		 Closing Balance
1 600000 20% 120000 480000
2 480000 32% 192000 288000
3 288000 19.20% 115200 172800
4 172800 11.52% 69120 103680
5 103680 11.52% 69120 34560
6 34560 5.76% 34560 0

Statement showing NPV

Particulars 0 1 2 3 4 5 NPV = sum of PV
Cost of machine -600000.00
Sales revenue 10000.00 10000.00 10000.00 10000.00 10000.00
Savings in cost 5000.00 5000.00 5000.00 5000.00 5000.00
Depreciation -120000.00 -192000.00 -115200.00 -69120.00 -69120.00
PBT -105000.00 -177000.00 -100200.00 -54120.00 -54120.00
Tax Shield @ 21% 22050.00 37170.00 21042.00 11365.20 11365.20
PAT -82950.00 -139830.00 -79158.00 -42754.80 -42754.80
Add: Depreciation 120000.00 192000.00 115200.00 69120.00 69120.00
Annual cash flow 37050.00 52170.00 36042.00 26365.20 26365.20
Cash flow from sale of machine (Note 1) 19107.60
Total cash flow -600000.00 37050.00 52170.00 36042.00 26365.20 45472.80
PVIF @ 10% 1.00 0.91 0.83 0.75 0.68 0.62
PV -600000.00 33681.82 43115.70 27078.89 18007.79 28235.03 -449880.77

After tax cash flow of new machine t 4 = 26365.20 $

After tax cash flow of new machine t 5 = 45472.80 $

Thus NPV = -449880.77 $

Not 1) Cash flow from sale of asset

Particulars Amount
Selling price of machine 15000
Book value of machine at end of year 5 34560
Loss 19560
Tax shield @ 21% 4107.6
Cash flow from sale of machine
(15000+4107.6)		 19107.6

jeff jeffy answered 1 year ago
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