You are evaluating the purchase for a manufacturing machine; the price is $120,000 and it will save company $50,000 of expenses every year. The machine is depreciated using three-year straight-line schedule and will be sold after that for $50,000. The project would have no effect on revenues, and the corporate tax rate is 30%. What is the project’s after-tax cash flow in Year 3?
(A) |
$35,000. |
(B) |
$47,000. |
(C) |
$60,000. |
(D) |
$70,000. |
(E) |
$82,000. |
2. Using the same information from previous question (Question 15). The machine will be sold for $50,000 after three years. What is the Year 3 after-tax cash flow if the machine is depreciated using MACRS 3-year class where the applicable depreciation rates are 33%, 45%, 15% and 7%.
(A) |
$26,600. |
(B) |
$61,600. |
(C) |
$69,520. |
(D) |
$75,400. |
(E) |
$77,920. |
1) | (E) | $ 82,000 | |||
Working: | |||||
Step-1:Calculation of after tax operating cash flow | |||||
Saving of expense | $ 50,000 | ||||
Depreciation | $ -40,000 | ||||
Profit before tax | $ 10,000 | ||||
Tax Expense | $ -3,000 | ||||
Net Income | $ 7,000 | ||||
Depreciation | $ 40,000 | ||||
After tax operating cash flow | $ 47,000 | ||||
Step-2:After tax cash flow from sale of asset | |||||
After tax cash flow from sale of asset | = | Before tax sale *(1- Tax rate) | |||
= | 50000*(1-0.30) | ||||
= | $ 35,000 | ||||
Working: | |||||
Depreciation expense | = | Cost / Useful Life | |||
= | 120000/3 | ||||
= | $ 40,000 | ||||
Step-3:After tax cash flow in year 3 | |||||
Operating cash flow | $ 47,000 | ||||
Terminal Cash flow | $ 35,000 | ||||
Cash flow in year 3 | $ 82,000 | ||||
2) | (E) | $ 77,920 | |||
Working: | |||||
Step-1:Calculation of after tax operating cash flow | |||||
Saving of expense | $ 50,000 | ||||
Depreciation | $ -18,000 | ||||
Profit before tax | $ 32,000 | ||||
Tax Expense | $ -9,600 | ||||
Net Income | $ 22,400 | ||||
Depreciation | $ 18,000 | ||||
After tax operating cash flow | $ 40,400 | ||||
Step-2:After tax cash flow from sale of asset | |||||
After tax cash flow from sale of asset | = | Before tax sale *(1- Tax rate) | |||
= | 50000-((50000-8400)*0.30) | ||||
= | $ 37,520 | ||||
Working: | |||||
Depreciation Schedule: | |||||
Year | Cost | Depreciation rate | Depreciation expense | Accumulated Depreciation expense | Book Value |
1 | $ 1,20,000 | 33% | $ 39,600 | $ 39,600 | $ 80,400 |
2 | $ 1,20,000 | 45% | $ 54,000 | $ 93,600 | $ 26,400 |
3 | $ 1,20,000 | 15% | $ 18,000 | $ 1,11,600 | $ 8,400 |
Step-3:After tax cash flow in year 3 | |||||
Operating cash flow | $ 40,400 | ||||
Terminal Cash flow | $ 37,520 | ||||
Cash flow in year 3 | $ 77,920 | ||||
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