Question

An​ automobile-manufacturing company is considering purchasing an industrial robot to do spot​ welding, which is currently done by skilled labor. The initial cost of the robot is

​$280000 and the annual labor savings are projected to be ​$178672. If​ purchased, the robot will be depreciated under MACRS as a​ five-year recovery property. The robot will be used for seven​ years, at the end of which​ time, the firm expects to sell it for ​$51000.The​ company's marginal tax rate is 26​%over the project period. Assume MARR =11​% Determine the net​ after-tax cash flows for each period over the project life

Answer 1

Depreciation schedule is developed as under

Year	Depreciation rate, d	Depreciation=280000*d
1	20%	56000
2	32%	89600
3	19.20%	53760
4	11.52%	32256
5	11.52%	32256
6	5.76%	16128

After tax cash flows can be calculated as under:

Year	BTCF	Depreciation, D	TI=BTCF-D	Tax, T @26%	ATCF= BTCF-T
0	-280000		-280000		-280000.00
1	178672	56000	122672	31894.72	146777.28
2	178672	89600	89072	23158.72	155513.28
3	178672	53760	124912	32477.12	146194.88
4	178672	32256	146416	38068.16	140603.84
5	178672	32256	146416	38068.16	140603.84
6	178672	16128	162544	42261.44	136410.56
7	229672		229672	59714.72	169957.28

Please note that the asset is fully depreciated in year 6. So, asset sale of asset in year 7 will be an ordinary income and it will be subjected for tax. Hence, total cash flow in year 7 is shown as  $229672 (178672+51000).