Company is planning to buy a machinery at a cost of $20 million. This machine will be used for 10 years. The machine will bring additional revenue as follows:
$10 million for first 6 years and $7 million for the last 4 years
Expenses = 60% of revenue for all 10 years
After 10 years the machine will be sold for an estimated price of $2 million and the estimated selling expense is $400,000.
Tax rate = 20%
A. Find the net cash flow for t = 0
B. Find the after tax cash flow for each year from year 1 to year 10.
A. To find the net cash flow for t = 0, we need to calculate the initial investment and the estimated selling expense for the machine.
Initial investment = Cost of the machinery - Estimated selling expense
Initial investment = $20 million - $400,000
Initial investment = $19.6 million
Therefore, the net cash flow for t = 0 is -$19.6 million.
B. To find the after-tax cash flow for each year from year 1 to year 10, we need to calculate the revenue, expenses, and the after-tax cash flow for each year.
Year 1:
Revenue = $10 million
Expenses = 60% * $10 million = $6 million
Taxable income = Revenue - Expenses = $10 million - $6 million = $4 million
Tax paid = 20% * $4 million = $800,000
After-tax cash flow = Revenue - Expenses - Tax paid = $10 million - $6 million - $800,000 = $3.2 million
Year 2 to Year 6:
Revenue = $10 million
Expenses = 60% * $10 million = $6 million
Taxable income = Revenue - Expenses = $10 million - $6 million = $4 million
Tax paid = 20% * $4 million = $800,000
After-tax cash flow = Revenue - Expenses - Tax paid = $10 million - $6 million - $800,000 = $3.2 million
Year 7 to Year 10:
Revenue = $7 million
Expenses = 60% * $7 million = $4.2 million
Taxable income = Revenue - Expenses = $7 million - $4.2 million = $2.8 million
Tax paid = 20% * $2.8 million = $560,000
After-tax cash flow = Revenue - Expenses - Tax paid = $7 million - $4.2 million - $560,000 = $2.24 million
Therefore, the after-tax cash flow for each year from year 1 to year 10 is as follows:
Year 1: $3.2 million
Year 2 to Year 6: $3.2 million
Year 7 to Year 10: $2.24 million
To find the net cash flow at t = 0, we need to calculate the initial cash outflow for purchasing the machinery.
A. Finding the net cash flow at t = 0:
The cost of the machinery is given as $20 million. Therefore, the net cash flow at t = 0 is simply -$20 million since it represents an initial cash outflow.
Next, let's calculate the after-tax cash flow for each year from year 1 to year 10. To do this, we will calculate the revenue, expenses, and net cash flow for each year, taking into account the tax rate.
B. Finding after-tax cash flow for each year from year 1 to year 10:
For years 1-6:
Revenue for each of the first 6 years is $10 million.
Expenses for each of the first 6 years are 60% of the revenue, which is $6 million.
The taxable income for each of the first 6 years is the revenue minus expenses, which is $10 million - $6 million = $4 million.
The tax payment for each of the first 6 years is the taxable income multiplied by the tax rate of 20%, which is $4 million * 20% = $0.8 million.
The after-tax cash flow for each of the first 6 years is the revenue minus expenses minus tax payment, which is $10 million - $6 million - $0.8 million = $3.2 million.
For years 7-10:
Revenue for each of the last 4 years is $7 million.
Expenses for each of the last 4 years are 60% of the revenue, which is $4.2 million.
The taxable income for each of the last 4 years is the revenue minus expenses, which is $7 million - $4.2 million = $2.8 million.
The tax payment for each of the last 4 years is the taxable income multiplied by the tax rate of 20%, which is $2.8 million * 20% = $0.56 million.
The after-tax cash flow for each of the last 4 years is the revenue minus expenses minus tax payment, which is $7 million - $4.2 million - $0.56 million = $2.24 million.
Finally, let's calculate the net cash flow for the last year, year 10, which includes the estimated selling price and selling expense:
The estimated selling price is $2 million.
The estimated selling expense is $400,000.
The net cash flow for year 10 is the estimated selling price minus the selling expense, which is $2 million - $400,000 = $1.6 million.
Therefore, the after-tax cash flow for each year from year 1 to year 10 is as follows:
Year 1: $3.2 million
Year 2: $3.2 million
Year 3: $3.2 million
Year 4: $3.2 million
Year 5: $3.2 million
Year 6: $3.2 million
Year 7: $2.24 million
Year 8: $2.24 million
Year 9: $2.24 million
Year 10: $1.6 million