Business, 06.05.2020 05:06 shelbiec5355

A company bought a machine for $20,000. The machinehas a useful life of 5 years and a salvage value of $4,000. The machine can bringa net saving of $6,000/year. Assume straight-line depreciation is usedand a flat tax rate of 34%. Interest rate is 10%. What is the after-tax B/C ratio of this machine?

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Answer from: babas97

B-C Ratio= 1.09

Explanation:

Initial Cost=C=$20,000

Salvage =S=$4000

Useful life=n=5 years

Depreciation per year=D=(C-S)/n

=(20000-4000)/5

=$3200

Year (a) (b) c=(a)-(b) (d) (e )=(a)-(d)

Before Depreciation Taxable Income After tax

Tax Cash income Tax at 34% cash flow

flow

0 -20000 -20000

1 6000 3200 2800 952 5048

2 6000 3200 2800 952 5048

3 6000 3200 2800 952 5048

4 6000 3200 2800 952 5048

5 6000 3200 2800 952 5048

5 4000 4000

Combine cash flow for 5 years:

10000 3200 2800 952 9048

Special care is taken to consider the after tax flow for resale/salvage. We assume that machine is sold for defined salvage value. So, it is not subjected to tax. So, I have shown it seperately. Combined cash flow flows are also indicated in the table.

PV of regular cash inflows=PV(B)

=5048*(P/A,0.10,5)

=5048*3.790787

=19135.89

PV of salvage=PV(M)=4000*(P/F,0.10,5)

=4000*0.620921

=$2483.68

Interest factors are calculated as;

(P/F,0.10,5)=1/(1+0.10)^5

=0.620921

(P/A,i,n) = [1-1/(1+i)^n]/i

= [ 1 -1/(1+0.10)^5]/0.10

= 3.790787

B-C Ratio=PV(B)/[C-PV(M)]

=19135.89/(20000-2483.68)

=1.09

Answer from: Quest

The third one is true. 0.3 > 0.20

Answer from: Quest

Can you choose anything?

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A company bought a machine for $20,000. The machinehas a useful life of 5 years and a salvage value...

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