Question

4

You are evakuating the decision to invest in a new machine or to continue using existing equipment year and the operating cost of the existing equipment is $56 per year. The cost of the new machine, paid in year O, is $109. The operating cost of the new machine is $21 per The annual discount rate is 17% ver a five year time horizon, assuming that the cost of the new machine would be paid in year O and either machine would operate in years cannot be depreciated in the way that we have discussed in class, and that the tax rate is zero. The machine has no salvage Hint: you want calculate the incremental NPV of the new machine less the old machine.) Question 4 1 pts A n oil well project has an intangble drinngcost of $1820, 30% of which can be amortized over 60 months. b Year 2 of the wel sperat on reve nesare S1270and operating costs are $366. There are no other depreciatle tangible assets, no royalties and n° depletion costs. The tax rate is 20% Calculate the after tax cash flow for this oil wel project in Year 2. Note that i oua cu ate a negative taxable income, please assrne a negative tax parment ea al to 20% of the taxable income 0meaning that the po ect wold effectively ean a tax credit Do not assume that taxes are zero. 1 pts D Question 5

Answer 1

Question - 4

Final answer for After tax cash flow = 745.04

Explanation

Revenues	1270
(-) Operating costs	366
(-) Amortization
= 1820 * 1/5 * 30%	109.2
Taxable Income	794.8
(-) Tax @ 20%	158.96
Income after tax	635.84
(+) Amortization	109.2
After tax cash flow	745.04

As given the question, only 30% of the intangible drilling cost is amortized in first 5 Years ( i.e 60 months ).

So we compute the amortization for year - 2 = 1820 * 1/5 * 30%.