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 is the after-tax benefit-cost ratio?

using straight-line depreciation. What is the after-tax net present value (NPV)?

using straight-line depreciation. What is the before-tax net present value (NPV)?

Answer 1

Pls see table below for calculations and answers.

		SL depreciation = (850000 - 52036) / 10	201952 - 51300		21% of taxable income		Net cash flow / (1.09^time)		Net cash flow / (1.09^time)
Time	Initial investment / Salvage	Depreciation	Cash flow from asset	Taxable income	Income tax	Net cash flow after tax	PV (Net cash flow after tax)	Net cash flow before tax	PV (net cash flow before tax)
	A	B	C	D=C+B	E	F=A+C+E	G	H=A+C	I
0	-8,50,000					-8,50,000	-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	1,50,652	1,38,213
2		-79,796	1,50,652	70,856	-14,880	1,35,772	1,14,277	1,50,652	1,26,801
3		-79,796	1,50,652	70,856	-14,880	1,35,772	1,04,841	1,50,652	1,16,331
4		-79,796	1,50,652	70,856	-14,880	1,35,772	96,185	1,50,652	1,06,726
5		-79,796	1,50,652	70,856	-14,880	1,35,772	88,243	1,50,652	97,913
6		-79,796	1,50,652	70,856	-14,880	1,35,772	80,957	1,50,652	89,829
7		-79,796	1,50,652	70,856	-14,880	1,35,772	74,272	1,50,652	82,412
8		-79,796	1,50,652	70,856	-14,880	1,35,772	68,140	1,50,652	75,607
9		-79,796	1,50,652	70,856	-14,880	1,35,772	62,513	1,50,652	69,364
10	52,036	-79,796	1,50,652	70,856	-14,880	1,87,808	79,332	2,02,688	85,618
						Total benefit	8,93,321
						Total cost	8,50,000
						B/C Ratio	1.050965729
						NPV	43,321		1,38,814