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%. Assume Man-U-Facturing Inc. uses SOYD depreciation. What the is the after-tax benefit-cost ratio?

Answer 1

After tax B/C ratio is 1.067 as per table below.

		SOYD for Y1 = (850000 - 52036) * 10 /55, for Y2 = (850000 - 52036) * 9/55 and so on	201952 - 51300		21% 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		-1,45,084	1,50,652	5,568	-1,169	1,49,483	1,37,140
2		-1,30,576	1,50,652	20,076	-4,216	1,46,436	1,23,252
3		-1,16,067	1,50,652	34,585	-7,263	1,43,389	1,10,723
4		-1,01,559	1,50,652	49,093	-10,310	1,40,342	99,422
5		-87,051	1,50,652	63,601	-13,356	1,37,296	89,233
6		-72,542	1,50,652	78,110	-16,403	1,34,249	80,048
7		-58,034	1,50,652	92,618	-19,450	1,31,202	71,772
8		-43,525	1,50,652	1,07,127	-22,497	1,28,155	64,317
9		-29,017	1,50,652	1,21,635	-25,543	1,25,109	57,603
10	52,036	-14,508	1,50,652	1,36,144	-28,590	1,74,098	73,541
						Total benefit	9,07,052
						Total cost	8,50,000
						B/C Ratio	1.067119662