Clementine Company is considering the purchase of a new machine for $160,000. The machine would generate an annual cash flow before depreciation and taxes of $62,588 for four years. At the end of four 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 per year?

Question

Quizplus · Accepted Answer

To calculate the annual net after-tax cash flow, we need to first calculate the annual depreciation expense:
Depreciation expense = (Cost of machine - Salvage value) / Useful life
Depreciation expense = ($160,000 - $0) / 4 = $40,000 per year

Next, we can calculate the annual earnings before taxes (EBT):
EBT = Annual cash flow - Depreciation expense
EBT = $62,588 - $40,000 = $22,588

Then, we can calculate the annual taxes:
Taxes = EBT x Tax rate
Taxes = $22,588 x 0.4 = $9,035.20

Finally, we can calculate the annual net after-tax cash flow:
Net cash flow = Annual cash flow - Taxes - Depreciation expense
Net cash flow = $62,588 - $9,035.20 - $40,000 = $13,552.80

Therefore, the annual net after-tax cash flow is $13,552.80, which is closest to option B, $53,553.

Clementine Company Is Considering the Purchase of a New Machine