6. A project will require the investment of S133,000 in equipment with a salvage

Question

6. A project will require the investment of S133,000 in equipment with a salvage value at the end of eight years of $25,000. The annual projected income after all expenses exeept depreciation have been paid is projected to be $13,500. It is depreciated over 8 years using straight line depreciation. At the end of eight years the equipment sold for $30,000. Determine the after tax cash flow assuming a 34% combined tax rate. Capital gains (depreciation recapture) or losses will be taxed as normal income. (19 pts) BTCF-5L Depr. Income apts) BT 0 $133,000 $24,000 $13,500 $24,000 $13,500 3$24,000 $13,500 4 $24,000 $13,500 $24,000 $13,500 $24,000 $13,500 $24,000 S13.500 $24,000 $13,500 $30,000$1350

Explanation / Answer

Below is the table that calculates the after tax cash flows

Note that salvage value is 25000 but sale value is 30000 implying capital gains of 5000 and a capital gain tax of 34% or 1700. Net cash flows has depreciation of 13500 and 66% of taxable income which is (revenue - depreiciation) = 66% x (24000 - 13500) = 6930. This makes annual net cash flow = 6930 + 13500 = 20430

Year 0 1 2 3 4 5 6 7 8 Income statement Revenues 24000 24000 24000 24000 24000 24000 24000 24000 Depreciation 13500 13500 13500 13500 13500 13500 13500 13500 Taxable income 10500 10500 10500 10500 10500 10500 10500 10500 Income tax 3570 3570 3570 3570 3570 3570 3570 3570 Net income 6930 6930 6930 6930 6930 6930 6930 6930 Depreciation 13500 13500 13500 13500 13500 13500 13500 13500 Investment -133000 Gains 5000 Gains tax -1700 Net cash flow -133000 20430 20430 20430 20430 20430 20430 20430 23730

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