Question 10 A company has just purchased a machine for 100,000 kroner. The machi

Question

Question 10 A company has just purchased a machine for 100,000 kroner. The machine must be depreciated linearly over 5 years. However, the company estimates its useful productive life to be only 4 years and the company may therefore write off the remaining book value in year 4. The machine will generate net cash flows before taxes (excluding effects of depreciation) of 40,000 kroner annually The relevant tax rate is 30%. What are the expected cash flows after tax from the machine in year 4? A. 34,000 kroner B. 40,000 kroner 48,000 kroner D 60,000 kroner choose not to answer. Me o

Explanation / Answer

Depreciation per year = 100000/5 = DK20000
Book value of machine in Year 4 = DK100000-DK20000*4 = DK20000
Tax savings due to write off = DK20000*30% = DK6000.

Net cashflow before tax = DK40000
Less: Tax rate @30% = (DK12000)
Cashflow after tax = DK28000
Add: Tax savings = DK6000

Expected cashflow after tax= DK34000
Option A

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