Springer 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

The annual net after-tax cash flow is calculated by taking the annual cash flow before depreciation and taxes, subtracting taxes, and adding back depreciation. The depreciation expense is $16,000 ($80,000/5 years). The taxable income is $12,778 ($28,778 - $16,000), and the tax is $5,111 (40% of $12,778). The net income is $7,667 ($12,778 - $5,111). Adding back depreciation gives $23,667 ($7,667 + $16,000).

Springer Company Is Considering the Purchase of a New Machine