Hi Shri,
The questions asked about incremental cash flow at fifth year only.
Labor cost reduction= 30,000 x .60=18,000.00
Depreciation= 100,000/5= 20,000 x .40 = 8,000.00
Total 26,000.00
The difference between old and new machine will not come in Fifth year cash flow.
If i am wrong, pls. correct me.
Thank you,
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Arunkumar Krishnan
Accountant
Al-Yusr Industrial Contracting Co.
Yanbu
Saudi Arabia
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Original Message:
Sent: 05-02-2020 12:19 PM
From: Shri Gowri Sundararaman
Subject: NPV
Hi!
Effective tax rate = 40% Cost of capital = 12%
Data regarding the the existing and new machine is given:
Existing machine New machine
Original cost 50,000 90,000
Installation cost 0 4,000
Freight and insurance 0 6,000
Expected salvage value 0 0
Depreciation method Straight line Straight line
Expected useful life 10 years 5 years
The existing machine has been in service for 7 years and could be sold for $25,000 currently. The expected before tax annual reduction in labor costs is $30,000 if the new machine is purchased.
If the new machine is purchased, what is the incremental after tax cash flow for the fifth year?
Answer: $26,000
When calculating the depreciation tax shield, why is the change in depreciation amount (or the difference between the old and new machine's depreciation) not used?
Thank you!