An asset in the five-year MACRS property class costs $150,000 and has a zero est

Question

An asset in the five-year MACRS property class costs $150,000 and has a zero estimated salvage value after six years of use. The asset will generate annual revenues of $320,000 and will require $80,000 in annual labor and $50,000 in annual material expenses There are no other revenues and expenses. Assume a tax rate of 40% Click the icon to view the MACRS depreciation schedules. Click the icon to view the interest factors for discrete compounding when i: 12% per yea (a) Compute the after-tax cash flows over the project life. Fill in the table below. (Round to two decimal places.) Period Net After-Tax Cash Flow S -150 thousand $ 126 thousand 3133.2 thousand 3 $125.52 thousand S thousand thousand sthousand

Explanation / Answer

WORKING NOTE 1: Calculation of Depreciation

Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 INITIAL INVESTMENT $     (150,000.00) Annual cash flow $      320,000.00 $      320,000.00 $      320,000.00 $      320,000.00 $      320,000.00 $      320,000.00 Less: Cost ($80,000 + $50,000) $      130,000.00 $      130,000.00 $      130,000.00 $      130,000.00 $      130,000.00 $      130,000.00 EBDIT $      190,000.00 $      190,000.00 $      190,000.00 $      190,000.00 $      190,000.00 $      190,000.00 Less: Depreciation (Working Note 1) $        30,000.00 $        48,000.00 $        28,800.00 $        17,280.00 $        17,280.00 $          8,640.00 PBT $      160,000.00 $      142,000.00 $      161,200.00 $      172,720.00 $      172,720.00 $      181,360.00 Less: Taxes@40% $        64,000.00 $        56,800.00 $        64,480.00 $        69,088.00 $        69,088.00 $        72,544.00 PAT $        96,000.00 $        85,200.00 $        96,720.00 $      103,632.00 $      103,632.00 $      108,816.00 Add: Depreciation $        30,000.00 $        48,000.00 $        28,800.00 $        17,280.00 $        17,280.00 $          8,640.00 After tax Operating cash flow (OCF) $     (150,000.00) $      126,000.00 $      133,200.00 $      125,520.00 $      120,912.00 $      120,912.00 $      117,456.00

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