Question

2) A laser cutting machine bought at a cost of $300,000 for a customer that had given a 5-year contract with the possibility of extending the contract for another 5 years. The company uses the MACRS depreciation method for this equipment as a 5-year property for tax purposes. The income tax rate for the company is 20%, and the company expects to have an after -tax rate of return of 10 % in all its investments. The laser cutting machine generated an annual income of $90,000 for the first Three years. After that the company ended up selling the laser cutting machine for $240,000. Complete the table below (Ignore Decimal points) MACRS ATCF, $ BV BTCF, Тахаble Income Tax ??? Year Income, $ @ 20%, $ 0 1 2 3 4 5 4 Extra: 5 points: Was it worth on this investment with 10% RoR?

Answer 1

Year	BTCF	MACRS Depreciation rate	Depreciation	Taxable income	Tax	ATCF	BV at the end of the year
1	90000	20.00%	$    60,000.00	$    30,000.00	$      6,000.00	$     84,000.00	$       2,40,000.00
2	90000	32.00%	$    96,000.00	$    -6,000.00	$    -1,200.00	$     91,200.00	$       1,44,000.00
3	90000	19.20%	$    57,600.00	$    32,400.00	$      37,200.00	$ 3,54,240.00	$          86,400.00

Depreciation Schedule:
Year	MACRS Depreciation rate	Depreciation	BV at the end of the year
1	20.00%	20% x 300000 = $60,000.00	$       2,40,000.00
2	32.00%	32% x 300000 = 96,000.00	$       1,44,000.00
3	19.20%	19.20% x 300000 = 57,600.00	$          86,400.00
Following is the calculation of CF:
Particulars	Remark	0	1	2	3
EBITDA	Annual income		$          90,000.00	$         90,000.00	$         90,000.00
Depreciation	As per MACRS		$          60,000.00	$         96,000.00	$         57,600.00
EBT	EBITDA-Depreciation		$          30,000.00	$          -6,000.00	$         32,400.00
Tax	20% x EBT		$            6,000.00	$          -1,200.00	$           6,480.00
EAT	EBT-Tax		$          24,000.00	$          -4,800.00	$         25,920.00
Depreciation	Added back as non cash		$          60,000.00	$         96,000.00	$         57,600.00
OCF	EAT+Depreciation		$          84,000.00	$         91,200.00	$         83,520.00
FCINV	Given	$      -3,00,000.00
FCINV	Given	$      -3,00,000.00
Salvage	Given				$     2,40,000.00
Tax on profit	20% of (240000-86400)				$         30,720.00
FCF	OCF+FCINV+Salvage+Tax on profit	$      -3,00,000.00	$          84,000.00	$         91,200.00	$     3,54,240.00