ABC wants to buy a machine for 50000 which will increase cash flows of 15000 for

Question

ABC wants to buy a machine for 50000 which will increase cash flows of 15000 for the next 4 years which is the useful life of the machine. How much is the net cash flow per year after taxes if the tax rate is 30%

ABC company will have the following cash flows for a new project.

Initial investment                                              100000

Year 1                                                                   50000

Year 2                                                                   20000

Year 3                                                                   20000

Year 4                                                                  30000

Year 5                                                                  10000

Year 6                                                                   5000

Calculate the payback.

Explanation / Answer

ABC Details Amt $ Increase in Cash flow per year          15,000.00 The details of the cash flow not clearly given, It is generally assumed that cash flow is after tax profit plus depeciation added back. So cash flow given is after tax net income plus depreciation added back. Therefore yearly net cash flow after tax should be $15,000 only PAyBAck Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Cash Flows            (100,000) 50,000 20,000     20,000     30,000     10,000      5,000 Payback   3.33 years

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