Clemens 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

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 tax savings from depreciation is calculated as: Depreciation = $160,000 / 4 = $40,000. Tax savings = $40,000 * 40% = $16,000. After-tax cash flow = ($62,588 - ($62,588 - $40,000) * 40%) + $16,000 = $53,553.

Clemens Company Is Considering the Purchase of a New Machine