Question

Man-U-Facturing Inc. will buy a machine that has a cost of $850,000 and is expected to be useful for 10 years. At the end of the 10th year, the firm intends to sell the machine for an estimated price of $52,036. In addition, the yearly benefits are expected to be $201,952 while the annual maintenance costs are predicted to be $51,300. The company uses a 9% interest rate for this project and it is currently being taxed at a flat tax rate of 21%. This time assume that Man-U-Facturing Inc. uses straight-line depreciation. What the is the after-tax benefit-cost ratio?

Answer 1

Pls see table below. After tax B/C ratio is 1.051 approx

		SL depreciation = (850000 - 52036) / 10	201952 - 51300		T21% of taxable income		Net cash flow / (1.09^time)
Time	Initial investment / Salvage	Depreciation	Cash flow from asset	Taxable income	Income tax	Net cash flow	PV (Net cash flow)
	A	B	C	D=C+B	E	F=A+C+E	G
0	-8,50,000					-8,50,000	-8,50,000
1		-79,796	1,50,652	70,856	-14,880	1,35,772	1,24,562
2		-79,796	1,50,652	70,856	-14,880	1,35,772	1,14,277
3		-79,796	1,50,652	70,856	-14,880	1,35,772	1,04,841
4		-79,796	1,50,652	70,856	-14,880	1,35,772	96,185
5		-79,796	1,50,652	70,856	-14,880	1,35,772	88,243
6		-79,796	1,50,652	70,856	-14,880	1,35,772	80,957
7		-79,796	1,50,652	70,856	-14,880	1,35,772	74,272
8		-79,796	1,50,652	70,856	-14,880	1,35,772	68,140
9		-79,796	1,50,652	70,856	-14,880	1,35,772	62,513
10	52,036	-79,796	1,50,652	70,856	-14,880	1,87,808	79,332
						Total benefit	8,93,321
						Total cost	8,50,000
						B/C Ratio	1.050965729