Question

The A.M.I. Company is considering installing a new process machine for the​ firm's manufacturing facility. The machine costs​ $220,000 installed, will generate additional revenues of​ $85,000 per​ year, and will save​ $65,000 per year in labor and material costs. The machine will be financed by a​ $120,000 bank loan repayable in three equal annual principal​ installments, plus​ 9% interest on the outstanding balance. The machine will be depreciated using​ seven-year MACRS. The useful life of the machine is 10​ years, after which it will be sold for​ $20,000. The combined marginal tax rate is​ 25%.

Find the​ year-by-year after-tax cash flow for the project. Fill in the table below. ​(Round to one decimal​ place.)

Answer 1

Determination of Cash flow after Tax:

Year	Cash flow	Applicable Depreciation rate on $ 220000	Depreciation Calculation	Depreciation amount	EBIT ( 2-5)	Interst	EBT( 6-7)	Tax @ 25%	Profit after tax(8-9)	Cash flow after Tax( 10+5)
1	2	3	4	5	6	7	8	9	10	11
0	($220,000)									($220,000)
1	$150,000	14.29%	$ 220000*14.29%	$                            31,438.00	$118,562.00	$10,800	$107,762.00	$26,940.50	$80,821.50	$112,259.50
2	$150,000	24.49%	$ 220000*24.49%	$                            53,878.00	$96,122.00	$7,200	$88,922.00	$22,230.50	$66,691.50	$120,569.50
3	$150,000	17.49%	$ 220000*17.49%	$                            38,478.00	$111,522.00	$3,600	$107,922.00	$26,980.50	$80,941.50	$119,419.50
4	$150,000	12.49%	$ 220000*12.49%	$                            27,478.00	$122,522.00	$0	$122,522.00	$30,630.50	$91,891.50	$119,369.50
5	$150,000	8.93%	$ 220000*8.93%	$                            19,646.00	$130,354.00	$0	$130,354.00	$32,588.50	$97,765.50	$117,411.50
6	$150,000	8.92%	$ 220000*8.92%	$                            19,624.00	$130,376.00	$0	$130,376.00	$32,594.00	$97,782.00	$117,406.00
7	$150,000	8.93%	$ 220000*8.93%	$                            19,646.00	$130,354.00	$0	$130,354.00	$32,588.50	$97,765.50	$117,411.50
8	$150,000	4.46%	$ 220000*4.46%	$                              9,812.00	$140,188.00	$0	$140,188.00	$35,047.00	$105,141.00	$114,953.00
9	$150,000				$150,000	$0	$150,000	$37,500.00	$112,500.00	$112,500.00
10	$170,000				$170,000	$0	$170,000	$42,500.00	$127,500.00	$127,500.00
	Total	100.00%		$                         220,000.00						$958,811.00

Note Annual Cash flow = $ 85000+$ 65000= $ 150000

* Savings in labour cost iis also considered as income

Since the machine is 100% Depreciated so there will be tax on salvage value

So Cash flow in Tenth year = $ 150000+$ 20000= $ 170000

Computation of Interest amount

Year	Opening Balance	Interest accrued@ 9%	Total	Amount paid	Closing Balance
1	$120,000.00	$10,800.00	$130,800.00	$50,800	$80,000.00
2	$80,000.00	$7,200.00	$87,200.00	$47,200	$40,000.00
3	$40,000.00	$3,600.00	$43,600.00	$43,600	$0.00

Installment amount = Loan amount /3 + Interest accured on every year

= $ 120000/3 + Interest

= $ 40000+interest accrued.

If you have any doubts,please post a comment.

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