# Exercise-17 (After-tax cash flows in net present value analysis)

Posted in: Capital budgeting techniques (exercises)

The Falcon company is considering to purchase a printing machine. The relevant information is given below:

- Cost of the printing machine: $150,000
- Annual cash inflows: $45,000
- Useful life of printing machine: 15 years
- Salvage value (Residual value) after 15-year period: $10,000
- Annual cash expenses: $5,000

Falcon company uses straight line method of depreciation. Salvage value is not taken into account for calculating depreciation for tax purposes. Tax rate of Falcon is 30% . Company requires a 14% after-tax return on all investments.

**Required:** Compute net present value of the printing machine.

## Solution:

**Net annual cash inflow = Annual cash inflow – Annual cash expenses**

= $45,000 – $5,000

= $40,000

*Value from “present value of an annuity of $1 in arrears table“.

**Tax savings from depreciation tax shield – depreciation is a tax deductible expense.

The printing machine has a positive net present value of $40,402 that makes it an acceptable investment.

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