Homework Answers
Cost of Machine - $60,000
Salvage Value = $4,000
Useful life - 7 years
Depreciation per year = 54,000/7 = $7,714, Tax saving on Depreciation = $7,714*34% = $2,623
Rate of return - 14%
Cash saving = $20,000 and Cash operating cost = $6,000
Net Benefit = $14,000
Net benefit + tax saving on Depreciation = $14,000+$2,623 = $16,623.
| Year | Benefits | PVF of 14% | Amount | |
| 1 | $ 16,623.00 | 0.8772 | $ 14,581.58 | |
| 2 | $ 16,623.00 | 0.7695 | $ 12,790.86 | |
| 3 | $ 16,623.00 | 0.6750 | $ 11,220.05 | |
| 4 | $ 16,623.00 | 0.5921 | $ 9,842.15 | |
| 5 | $ 16,623.00 | 0.5194 | $ 8,633.47 | 57068.1 |
| 6 | $ 16,623.00 | 0.4556 | $ 7,573.22 | |
| 7 | $ 16,623.00 | 0.3996 | $ 6,643.17 | |
| 1 | Recovered upto 5 years $ 57,068. | |||
| 2 | To be recovered in Year 6 is $2,932 ($60,000-$57,068) | |||
| 3 | $7,573/12 = $ 631.08 (6th year PV of cash flow) | |||
| 4 | $ 2,932/631.08 = 4.65 | |||
| 5 | 4.65/12 = 0.39 | |||
| 6 | No of years 5+.39 = 5.39 years | |||
No of years to recover = 5.39 years
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