Question

Pique Corporation wants to purchase a new machine for $300,000. Management predicts that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Pique's tax rate is 40%. Management requires a minimum rate of return of 10% on all investments. What is the annual after tax cash flow (AATCF)for Year 1 from the investment

Answer 1

Answer:

The annual after tax cash flow (AATCF) for Year 1 from the investment is $63,936

Explanation:

Given:

Revenues  = $ 200,000

Expenses  = $ 80,000

Depreciation  = $ 60,000

Net Profit before taxes  = $ 60,000

Tax at 40%  = $ 24,000

Net Profit after taxes  = $ 36,000

Depreciation  = $ 60,000

Cash Flow after taxes  = $ 96,000

NPV= ∑ {Periodical Cash Flow / $(1+R)^T$} - Initial Investment

Here,

Initial Investment = $300,000

After Tax rate of Return = 10%

Time Period = 5 Years

Periodical Cash Flow :-

Present value of the Cash Flow after taxes = Cash Flow X PVAF of 10% for 5 Years

= $96,000 × 3.791

= $ 363,936

NPV = Initial Investment - PV of cash Flow

NPV = $363,936 - $300,000

NPV = $63,936