Question
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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 |
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