ABC wants to buy a machine for 50000 which will increase cash flows of 15000 for the next 4 years...

Question:

ABC wants to buy a machine for 50000 which will increase cash flows of 15000 for the next 4 years which is the useful life of the machine. How much is the net cash flow per year after taxes if the tax rate is 30%.

ABC company will have the following cash flows for a new project:

Initial Investment $100,000
Year 1 50,000
Year 2 20,000
Year 3 20,000
Year 4 30,000
Year 5 10,000
Year 6 5,000

Calculate the payback.

Payback Period:

Payback period is the period within which our investment gets recouped. It is the period within which we earn our investments back. Any cash flow after the payback period is the profit for the company.

Answer and Explanation:

Cash flows from the machine = $15,000.00

Less: Depreciation per year = 50000 / 4 = $12,500.00

Earnings before tax = $2,500.00

Tax @ 30% = $750.00

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Learn more about this topic:

How to Calculate Payback Period: Method & Formula

from Financial Accounting: Help and Review

Chapter 5 / Lesson 24
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