Question

A chemical plant paying 43% in income taxes wants to purchase a ball mill designed to last for 20 years at a cost of $76,000, with no salvage value. Annual income generated will be $24,000 and annual expenditures will be $13,000. Using single line depreciation and a 10% interest rate, what is the 20-year after-tax present worth of the project

Answer 1

$8,709

Step-by-step explanation:

The computation of the after tax present worth of the project is shown below:

But before that first we have to need to do the following calculations

Straight line method using depreciation per year is

= (Cost of a chemical plant - Salvage value) ÷ Number of years

= $76,000 ÷ 20 years

= $3,800

Now

Net income per year is

= $24,000 - $13,000

= $11,000

And,

Taxable annual income is

= $11,000 - $3,800

= $7,200

So,

Tax per year is

= 0.43 × $7,200

= $3,096

Now

After tax cash flow is

= $11,000 - $3,096

= $7,904

So,

Present worth after tax is

= -$76,000 + $7,904 × (P/A,10%,20)

= -$76,000 + $7,904 × 8.513564

= $8,709