Answer:
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
