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Miller Inc. uses straight-line depreciation for both tax and financial reporting purposes. The following data
relate to Machine No. 108, which cost $400,000 and is being written-off over a five-year life.
Year Operating Income
1 $150,000
2 200,000
3 225,000
4 225,000
5 175,000
All of these amounts are on a before-tax basis. Miller is subject to a 40% income tax rate. The company
strives for a 12% rate of return. The traditional payback period for Machine No. 108 would be

1 2.22 years.
2 2.14 years. Correct 
3 1.15 years.
4 3.00 years

Explanation :
Depreciation expense = $400,000 ÷ 5 years = $80,000 per year
Cash flow each year = (operating income)(1 − 0.4) + ($80,000)
Cash flow, year 1 = ($150,000)(0.6) + $80,000 = $170,000
Cash flow, year 2 = ($200,000)(0.6) + $80,000 = $200,000
Cash flow, year 3 = ($225,000)(0.6) + $80,000 = $215,000
Cumulative cash flow after 2 years = $170,000 + $200,000 = $370,000
Cumulative cash flow after 3 years = $370,000 + $215,000 = $585,000
Payback is 2 years + ($400,000 − $370,000) ÷ ($215,000) = 2 + $30,000 ÷ $215,000 = 2 years + 0.14 years
= 2.14 years.

Now my question is why we consider depreciation expenses & avoid Tax shield portion?

secondly is their any special way of calculation in traditional methods

Request to clarify me
Thanks




------------------------------
Aaditya
------------------------------

Same Question here also. as I have studied 
Net cash flow ( should be) = 

   Income
- Deprectaion
---------------------
   EBT
-  Tax 40%
---------------------
   NI
+ Dep
---------------------
= Net Cash Flow

then this Amt. should be used for calculating the Payback Period  ( If I'm wrong then please rectify because i haven't studied about any traditional  payback method.

INC	DEP	EBT=inc-dep	TAX= ebt*40%	NI=ebt-tax	DEP	CASH FLOW=NI+ dep	Recovery
150000	-80000	70000	28000	42000	80000	122000	278000	1
200000	-80000	120000	48000	72000	80000	152000	126000	1
225000	-80000	145000	58000	87000	80000	167000	-41000	0.754491	2.7544 Years
225000	-80000	145000	58000	87000	80000	167000	-208000
175000	-80000	95000	38000	57000	80000	137000	-345000

------------------------------
Shivam Prajapati
Accountant
Lagos
Nigeria
------------------------------

Original Message:
Sent: 05-27-2020 09:44 AM
From: Aaditya Narayanan Chakravarthy Padmanabhan
Subject: PArt 2 Investment dedcision ( NPV-IRR)

Miller Inc. uses straight-line depreciation for both tax and financial reporting purposes. The following data
relate to Machine No. 108, which cost $400,000 and is being written-off over a five-year life.
Year Operating Income
1 $150,000
2 200,000
3 225,000
4 225,000
5 175,000
All of these amounts are on a before-tax basis. Miller is subject to a 40% income tax rate. The company
strives for a 12% rate of return. The traditional payback period for Machine No. 108 would be

1 2.22 years.
2 2.14 years. Correct
3 1.15 years.
4 3.00 years

Explanation :
Depreciation expense = $400,000 ÷ 5 years = $80,000 per year
Cash flow each year = (operating income)(1 − 0.4) + ($80,000)
Cash flow, year 1 = ($150,000)(0.6) + $80,000 = $170,000
Cash flow, year 2 = ($200,000)(0.6) + $80,000 = $200,000
Cash flow, year 3 = ($225,000)(0.6) + $80,000 = $215,000
Cumulative cash flow after 2 years = $170,000 + $200,000 = $370,000
Cumulative cash flow after 3 years = $370,000 + $215,000 = $585,000
Payback is 2 years + ($400,000 − $370,000) ÷ ($215,000) = 2 + $30,000 ÷ $215,000 = 2 years + 0.14 years
= 2.14 years.

Now my question is why we consider depreciation expenses & avoid Tax shield portion?

secondly is their any special way of calculation in traditional methods

Request to clarify me
Thanks




------------------------------
Aaditya
------------------------------

Thanks Shivam!



------------------------------
Aaditya Narayanan Chakravarthy Padmanabhan
Analyst
Quincy MA
United States
------------------------------

Original Message:
Sent: 05-27-2020 10:44 AM
From: Shivam Prajapati
Subject: PArt 2 Investment dedcision ( NPV-IRR)

Same Question here also. as I have studied
Net cash flow ( should be) =

   Income
- Deprectaion
---------------------
   EBT
-  Tax 40%
---------------------
   NI
+ Dep
---------------------
= Net Cash Flow

then this Amt. should be used for calculating the Payback Period  ( If I'm wrong then please rectify because i haven't studied about any traditional  payback method.

INC	DEP	EBT=inc-dep	TAX= ebt*40%	NI=ebt-tax	DEP	CASH FLOW=NI+ dep	Recovery
150000	-80000	70000	28000	42000	80000	122000	278000	1
200000	-80000	120000	48000	72000	80000	152000	126000	1
225000	-80000	145000	58000	87000	80000	167000	-41000	0.754491	2.7544 Years
225000	-80000	145000	58000	87000	80000	167000	-208000
175000	-80000	95000	38000	57000	80000	137000	-345000

------------------------------
Shivam Prajapati
Accountant
Lagos
Nigeria

Original Message:
Sent: 05-27-2020 09:44 AM
From: Aaditya Narayanan Chakravarthy Padmanabhan
Subject: PArt 2 Investment dedcision ( NPV-IRR)

Miller Inc. uses straight-line depreciation for both tax and financial reporting purposes. The following data
relate to Machine No. 108, which cost $400,000 and is being written-off over a five-year life.
Year Operating Income
1 $150,000
2 200,000
3 225,000
4 225,000
5 175,000
All of these amounts are on a before-tax basis. Miller is subject to a 40% income tax rate. The company
strives for a 12% rate of return. The traditional payback period for Machine No. 108 would be

1 2.22 years.
2 2.14 years. Correct
3 1.15 years.
4 3.00 years

Explanation :
Depreciation expense = $400,000 ÷ 5 years = $80,000 per year
Cash flow each year = (operating income)(1 − 0.4) + ($80,000)
Cash flow, year 1 = ($150,000)(0.6) + $80,000 = $170,000
Cash flow, year 2 = ($200,000)(0.6) + $80,000 = $200,000
Cash flow, year 3 = ($225,000)(0.6) + $80,000 = $215,000
Cumulative cash flow after 2 years = $170,000 + $200,000 = $370,000
Cumulative cash flow after 3 years = $370,000 + $215,000 = $585,000
Payback is 2 years + ($400,000 − $370,000) ÷ ($215,000) = 2 + $30,000 ÷ $215,000 = 2 years + 0.14 years
= 2.14 years.

Now my question is why we consider depreciation expenses & avoid Tax shield portion?

secondly is their any special way of calculation in traditional methods

Request to clarify me
Thanks




------------------------------
Aaditya
------------------------------

Hello, I recently joined the CMA course. I'm from Kerala, India. If there is any kind of Whatsapp group or something please share the link.

or else do contact me. My mob no is 8078276583

------------------------------
Amal Joji
Student
Ernakulam
India
------------------------------

Original Message:
Sent: 05-27-2020 09:44 AM
From: Aaditya Narayanan Chakravarthy Padmanabhan
Subject: PArt 2 Investment dedcision ( NPV-IRR)

Miller Inc. uses straight-line depreciation for both tax and financial reporting purposes. The following data
relate to Machine No. 108, which cost $400,000 and is being written-off over a five-year life.
Year Operating Income
1 $150,000
2 200,000
3 225,000
4 225,000
5 175,000
All of these amounts are on a before-tax basis. Miller is subject to a 40% income tax rate. The company
strives for a 12% rate of return. The traditional payback period for Machine No. 108 would be

1 2.22 years.
2 2.14 years. Correct
3 1.15 years.
4 3.00 years

Explanation :
Depreciation expense = $400,000 ÷ 5 years = $80,000 per year
Cash flow each year = (operating income)(1 − 0.4) + ($80,000)
Cash flow, year 1 = ($150,000)(0.6) + $80,000 = $170,000
Cash flow, year 2 = ($200,000)(0.6) + $80,000 = $200,000
Cash flow, year 3 = ($225,000)(0.6) + $80,000 = $215,000
Cumulative cash flow after 2 years = $170,000 + $200,000 = $370,000
Cumulative cash flow after 3 years = $370,000 + $215,000 = $585,000
Payback is 2 years + ($400,000 − $370,000) ÷ ($215,000) = 2 + $30,000 ÷ $215,000 = 2 years + 0.14 years
= 2.14 years.

Now my question is why we consider depreciation expenses & avoid Tax shield portion?

secondly is their any special way of calculation in traditional methods

Request to clarify me
Thanks




------------------------------
Aaditya
------------------------------