Question

After Tax Cash Flows Below is a list of aspects of various capital expenditure proposals that the capital budgeting team of Anchor, Inc., has incorporated into its net present value analyses during the past year. Unless otherwise noted, the items listed are unrelated to each other. Al situations assume a 40% income tax rate and an 11% minimum desired rate of retum 1. Pre-tax Savings of $4,000 in cash expenses will occur in each of the next three years 2. A machine is purchased now for $55,000 cash. 3. A long haul tractor costing $45,000 will be depreciated $15,000, 120,000, 56,800, and $3,200, respectively, on the tax return over four years. 4. Equipment costing $230,000 will be deprecated over five years on the tax return in the following amounts: 528,750 $57,500 $57.500 $57,500 and $28,750. S. Pre-tax Savings of $13.800 in cash expenses w occur in each of the next six years. 6. Pre tax savings of $12,000 in cash expenses will occur in the first, third, and fifth years from now. 7. The tractor described in aspect will be sold after four years for $10,000 cash 8. The equipment described in aspect 4 will be sold after four years for $25,000 cash. a. Calculate and record in column A the related after tax cash flow effects) b. Indicate in column B the timing of each cash flow shown in column A Use to indicate immediately and 1,2,3,4, and so on for each year involved The answer to investment aspect 1 is presented as an example. Use negative signs with answers that are cash outflows. Under Column B, select the appropriate year for the timing of each cash flow using the drop down menu

Answer 1

After Tax Investment Aspect Cash Flow Effects Year Inflow/ (Outflow) of Cash Flow Explanation 2,400 2,400 2,400 1 Pre Tax saving of $4,000 will become $2,400 net of taxes 2 $4,000 x 40% (Tax) = $1600, so $4000-1600= $2400 for each 3 of the 3 years 2 -55,000 O No tax benefit for the purchase of machine 6,000 8,000 2,720 1,280 Tax Savings @ 40% on account of depreciation 1 =15000*40% 21=20000*40% =6800*40% 41 =3200*40% 11,500 23,000 23,000 23,000 11,500 Tax Savings @ 40% on account of depreciation | =28750*40% 2 =57500*40% 3] =57500*40% 4 =57500*40% 5 =28750*40%

JA After Tax Investment Aspect Cash Flow Effects Year Explanation Inflow/ (Outflow) of Cash Flow 8,280 1 Pre Tax saving of $13,800 will become $8,280 net of taxes '$13,800 x 8,280 2 40% (Tax) = $5520, so $13,800-1600= $8280 for each of the 6 years 8,280 8,280 8,280 8,280 7,200 7,200 7,200 3 Pre Tax saving of $12,000 will become $7200 net of taxes $12,000 x 5 40% (Tax) = $4800, so $12000-4800= $7200 for each of the 3 years' The tractor in #3, has been fully depreciated at the end of 4th year for tax purposes, hence the sale will be a gain, and the Company shall have to pay tax on such gains, The tax on such gain is $10,000*40%=4000, so net cash inflow is $10,000-$4000=$6,000. 6,000 The equipment in #4, at the end of 4th year has not been fully depreciated. Total depreciation upto 4th year amounts to $201,750. The net depreciable value as per tax amounts to $230,000-$201,250 |= $28,750. The equipment is being sold @ $25,000 which amounts to a loss of $3,750. Hence there will be no tax out flow. Also presuming that there is a profit, we can have an additional tax saving of 40% on the loss on sale of equipment i.e. $3,750*40% = 4 $1500. Hence there is a net cash inflow of $25000+$1500= $26500 26,500