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A manufacturing company is considering acquiring a new injection-molding machine at a cost of $150,000. Because of a rapid change in product mix, the need for this particular machine is expected to last only eight years, after which time the machine is expected to have a salvage value of $10,000. The annual operating cost is estimated to be $11,000. The addition of the machine to the current production facility is expected to generate an annual revenue of $48,000. The firm has only $100,000 available from its equity funds, so it must borrow the additional $50,000 required at an interest rate of 10% per year with repayment of principal and interest in eight equal annual amounts. The applicable marginal income tax rate for the firm is 25%. Assume that the asset qualifies for a seven-year MACRS property class. 2 3 Click the icon to view the MACRS depreciation schedules. Click the icon to view the interest factors for discrete compounding when i = 14% per year. (a) Determine the after-tax cash flows. Fill in the table below. (Round to one decimal place.) Period Net After-Tax Cash Flow $ thousand $ thousand $ thousand

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The answer is:

The project is viable as the net present value is positive. The project yields even more than the cost of capital

Explanation:

250,000 + 20,000 = 270,000 investment cost.

revenue of 90,000

time of 5 years

and salvage value of 75,000 at the end of useful life.

Present value of the salvage value: present value of a lump sum

 

Salvage 75,000.00

time   5.00

rate  0.12

 

PV   42,557.01

Present value of revenues: will be considered ordinary annuity

C 90,000

time 5

rate 0.15

PV $324,429.86

Net present value:

present value of inflow less present value of outflow:

324,429.86  +  42,557.01 -270,000 = 96.986,87

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The after-tax cash flows can be seen in the attachment. After-tax cash flows are important for businesses and investors because they provide a measure of the amount of cash that is available for use after taxes have been paid.

After-tax cash flows refer to the amount of cash that is generated by a business or investment after taking into account the payment of taxes. These cash flows represent the amount of money that is available to be used for various purposes, such as reinvesting in the business, paying dividends to shareholders, or paying off debt.

To calculate after-tax cash flows, you need to first determine the pre-tax cash flows, which are the cash flows generated by the business or investment before taxes are taken into account. Then, you need to subtract the amount of taxes that will be paid on those cash flows.

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