Question

Assignment Capital Budgeting problem with After-tax Cash Flows Bell Manufacturing is considering purchasing a new labeling machine. The equipment will cost $180,000 and have a 5-year useful life. Expected salvage value is $20,000. Tax regulations permit the following depreciation schedule: Percent Deductible Year 1 20% 2 32 3 19 4 15 14

Answer 1

L 16 I coleco 200179 بلبلماح a Recommendation on puuchase of Asset Year of kash Inflow Present Value I puf I (Table 1) T Factor @ 4%. I 1.C 180000) (1800002 93600 0.961 80340 96494 i 01.994 89096 188181 0.889 | 78393 749692 T0 0.855 64098 1":63039 . 0.822 | 51812 2000 OP 0.822 16440 Net Present a "The net present value of the asset is positice. So, I recommened the company to purchase the casset b.) Recommendation & when we used straight - line methodl the amount of depreciation fixed during the life time of asset but in precent deductible of depreciation deb. is calkulated on WDV when we used the straight line method o there is difference in cash inflow mpared to cash flow generated through and deductible of depreciation method the project is favourable in both the then Precent deduct

Colo, , , C.) To make more valuable recommendtion to the company we want internal rate of retuin. Unlike the net present value method, the internal rate of return method does not used the desired rate of return but est mates the discount rate that makes the present value of subsequent net cash flows equal to the mitial investments

Notes Calculation of cash inflow Using Dep on percentaje deductible -(Table 1 year! I year rear 3 rear 4 Year 5. son Savings / 142000 134000 144000 120000 96000 Cash Expenses (18000) | (16000) (26000) | (18000) C10000) Depreciation 1 (36000) (46080)| (18605) |(11897) 19439) 68000 | 71920 199395 90103 90103 76,56] 199395 Tox 30% C20400) 1021576) (29819) 7627031) 1682968) 47600 503446957663072 53593 50349 og Debreciation 36000 9439 46080 18605 11897 63032 Cein gnflow 183600 1 96424 | 88181 74969 Using dep on straight line method (Table-2 Cash Souring | 192000 1 134000 T 194000 TT20000 96000 Cash Expense (18000) (16000) | C26000) IC 18000) Cloono) Depreciation (39000) (32000) 632000) (32000 32000) 72000 7186000 86000 70000 54000 Tox 30%. (21600) 1025800) 025800) Doo) | C16200). 5040060200 60200 49000 37800 Dep 32000 32000 32000 330 32000 cash gnflow 84.00 98200 199 200 81000 169800