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

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 company 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 the it an acceptable investment.

A D V E R T I S E M E N T
One Comment on Exercise-17 (After-tax cash flows in net present value analysis)
1. Lauraine

Hi
I thought the depreciation will be: cost lest residual all divided by the number of years
= (150000 -10000)/15 ?