Question

You are deciding whether to purchase a lightly-used Snow Dragon SND900 Snow Melter for $209,000. The machine has a useful life of 10 years. Boston is willing to pay $80,000 per year for snow removal during extreme winters and $40,000 per year during normal winters. Fuel costs will be $20,000 during extreme winters and $10,000 during normal winters. Winters in years 1-5 are expected to be extreme; winters in years 6-10 are expected to be normal. The corporate tax rate is 35% and the appropriate annual discount rate is 3.0%. a. What are the total CFs in extreme winters and normal winters?

Answer 1

Annual Operating cashflows:
Extreme Winters:
Annual Savings in c ost			80000
Less: Fuel cost			20000
Less: Depreciation(209000/10)			20900
Before Tax Income			39100
Less: Tax @ 35%			13685
After tax Income			25415
Add: Depreciation			20900
Annual Operating cashflows:			46315
Total Cashflows of Extreme Winters (46315*5):   231575
Normal Winters:
Annual Savings in c ost			40000
Less: Fuel cost			10000
Less: Depreciation(209000/10)			20900
Before Tax Income			9100
Less: Tax @ 35%			3185
After tax Income			5915
Add: Depreciation			20900
Annual Operating cashflows:			26815
Total Cashflows of Normal Winters (26815*5): 134075