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?

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 2 years ago

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