An industrial organization has bought a specialized machine for $240,000 which will save $36,000 each year...

An industrial organization has bought a specialized machine for $240,000 which will save $36,000 each year for 10 years. Straight Line (SL) basis depreciation should be taken into consideration with a depreciable life of 10 years. After tax MARR is 10% per year. Effective income tax rate is 40%. After 10 years, the machine will have zero salvage value. a) Draw a table showing Before Tax Cash Flow (BTCF) and After Tax Cash Flow (ATCF). b) Calculate the after tax PW and IRR. (Use interpolation method to find IRR). Is it feasible?

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Expert Solution

Year	gross income	initial investment & salvage value	before tax cash flow	depreciation	taxable income	taxes	after tax cash flow
0		-240000	-240000			0	-240000
1	36000		36000	24000	12000	4800	31200
2	36000		36000	24000	12000	4800	31200
3	36000		36000	24000	12000	4800	31200
4	36000		36000	24000	12000	4800	31200
5	36000		36000	24000	12000	4800	31200
6	36000		36000	24000	12000	4800	31200
7	36000		36000	24000	12000	4800	31200
8	36000		36000	24000	12000	4800	31200
9	36000		36000	24000	12000	4800	31200
10	36000	0	36000	24000	12000	4800	31200

Since company uses straight line depreciation method

after tax IRR is 5.091%

Since after tax present worth at MARR of 10% is less than 0 and after tax IRR is less than MARR. investment in the above machine is not recommended

Rahul Sunny answered 1 year ago

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