Hamlet Company is considering the purchase of a new machine that would cost $300

Question

Hamlet Company is considering the purchase of a new machine that would cost $300,000 and would have an estimated useful life of 10 years with no salvage value. The new machine is expected to have annual before-tax cash inflows of $100,000 and annual before-tax cash outflows of $40,000. The company will depreciate the machine using straight-line depreciation, and the assumed tax rate is 40% A. Determine the net after-tax cash inflow for the new machine B. Determine the payback period for the new machine Hamlet Company is considering the purchase of a new machine that would cost $300,000 and would have an estimated useful life of 10 years with no salvage value. The new machine is expected to have annual before-tax cash inflows of $100,000 and annual before-tax cash outflows of $40,000. The company will depreciate the machine using straight-line depreciation, and the assumed tax rate is 40% A. Determine the net after-tax cash inflow for the new machine B. Determine the payback period for the new machine A. Determine the net after-tax cash inflow for the new machine B. Determine the payback period for the new machine

Explanation / Answer

A). Net after tax cash inflow: (Cash inflow - Cash outflow- Depreciation)*60%
=(100000-40000-30000)*60% = 30000*60%= $18000 + Depreciation= 18000+30000 = $48000 per annum

B). Payback period for new machine = Initial Investment / Annual cash inflow = 300000/48000 = 6.25 years

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