Bodacious Company is considering the purchase of a new machine for $80,000. The machine would generate an annual cash flow before depreciation and taxes of $28,778 for five years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention and has a 40 percent tax rate. What is the annual net after-tax cash flow (rounded)?

Question

Quizplus · Accepted Answer

Annual net after-tax cash flow = (Annual cash flow before depreciation and taxes - Depreciation) x (1 - Tax rate)
Depreciation = (Purchase price - Salvage value) / Useful life
Depreciation = ($80,000 - $0) / 5 = $16,000 per year
Annual net after-tax cash flow = ($28,778 - $16,000) x (1 - 0.4) = $23,667.

Bodacious Company Is Considering the Purchase of a New Machine