Question

2. A tool costing $ 30000 has no salvage value. Its cash flow before tax is shown below. Year BTCF SOYD Depreciation Taxable income Taxes ATCF - 30000 +10000 +15000 +20000 The tool must be depreciated over 3 years according to SOYD method. The tax rate is 35% a) Fill in the remaining four columns in the Table. b) What is the after tax rate of return?

Answer 1

Answer:

(a)

Working notes:

(1) SOYD method depreciation:
Sum-of-years-digit (SOYD) = 1 + 2 + 3 = 6
Annual depreciation in year N = Cost x (Number of years remaining at beginning of year N / SOYD)
= 30,000 x (Number of years remaining at beginning of year N / 6
SOYD Depreciation schedule for 3 years as follows.

Year	Cost ($)	Depreciation Rate	Depreciation ($)
1	30,000	3/6	15,000
2	30,000	2/6	10,000
3	30,000	1/6	5,000

(2) Taxable income (TI) = BTCF - Depreciation
(3) Tax (T) = TI x Tax rate = TI x 0.35
(4) After-tax income = TI - T
(5) After-tax cash flow (ATCF) = After-tax income + Depreciation

Year	BTCF ($)	SOYD Depreciation ($)	TI ($)	T ($)	After-tax Income ($)	ATCF ($)
0	-30,000					-30,000
1	10,000	15,000	-5,000	-1,750	-3,250	11,750
2	15,000	10,000	5,000	1,750	3,250	13,250
3	20,000	5,000	15,000	5,250	9,750	14,750
					ROR of ATCF =	14.87%

b.) After-tax Rate of Return (ROR) of ATCF is computed using excel IRR function.