Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / The Board members of Work Lumber Mill company is considering a vision system to spot and remove Defects in incoming wood
The Board members of Work Lumber Mill company is considering a vision system to spot and remove Defects in incoming wood. Purchase and installation of the system costs $70,000 annual savings due to improved quality and material utilization are $55,000 per year. The system will be depreciated by MACRS using a 7 year recovery period class. Annual Maintenance expenses will be $35,000. The system will be used for 10 years and will have a $10,000 salvage value in year 10. The effective tax rate is 40% per year. Calculate CFBT and CFAT.
Solution -
Computation of CFBT and CFAT
| Year |
CFBT A |
Depreciation rate by MACRS B |
Annual depreciation C=70000*Rate |
Taxable income D=A-C |
Taxes at 40% E=D*0.4 |
CFAT F=A-E |
| 1 | 20000 | 14.29 | 10003 | 9997 | 3998.8 | 16001.2 |
| 2 | 20000 | 24.49 | 17143 | 2857 | 1142.8 | 18857.2 |
| 3 | 20000 | 17.49 | 12243 | 7757 | 3102.8 | 16897.2 |
| 4 | 20000 | 12.49 | 8743 | 11257 | 4502.8 | 15497.2 |
| 5 | 20000 | 8.93 | 6251 | 13749 | 5499.6 | 14500.4 |
| 6 | 20000 | 8.92 | 6244 | 13756 | 5502.4 | 14497.6 |
| 7 | 20000 | 8.93 | 6251 | 13749 | 5499.6 | 14500.4 |
| 8 | 20000 | 4.46 | 3122 | 16878 | 6751.2 | 13248.8 |
| 9 | 20000 | - | - | 20000 | 8000 | 12000 |
| 10 | 20000 | - | - | 30000 | 12000 | 12000 |
Total CFBT=210,000 Total CFAT= 161,244.8
Before tax cash flows (BTCF) will be annual savings- Annual Maintenance Expenses
BTCF=55000-35000= 20000 P.A.
*Depreciation will be charged on cost=70000
*MACRS depreciation rate has been taken from IRS guidelines.
