Tax savings due to depreciation 32000 035 11200 tax

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Tax savings due to depreciation $32,000 0.35 $11,200 * Tax effect on Depreciation is the tax rate Total annual cash flow $93,290.00 Part 2 Payback Period $200,000 / $93290 = 2.1 years Part 3 Annual rate of return Accounting income as result of decreased costs Annual cash savings (before tax effect) $126,293 Less Depreciation $(32,000) Before tax income $94,293 Tax at 35% rate $(33,003) After tax income $61,290 $61,290/$200,000 = 30.65% Part 4 Net Present Value Before Tax After tax 10% PV Present Item Year Amount Tax % Amount Factor Value Cost of machine 0 $(200,000) $(200,000) 1 $(200,000) Annual cash savings 1-5 $126,293 0.65 $82,090 3.791 $311,205 Tax savings due to depreciation 1-5 $32,000 0.35 $11,200 3.791 $42,459 Disposal value 5 $40,000 $40,000 0.621 $24,840 Net Present Value $178,504 Part 5 Internal Rate of Return Excel Function method to calculate IRR This function REQUIRES that you have only one cash flow per period (period 0 through period 5 for our example) This means that no annuity figures can be used. The chart for our example can be revised as follows: After Tax Item Year Amount Cost of machine 0 $(200,000) Year 1 inflow 1 $93,290 Year 2 inflow 2 $93,290 Year 3 inflow 3 $93,290 Year 4 inflow 4 $93,290 Year 5 inflow 5 $133,290 The IRR function will require the range of cash flows beginning with the initial cash outflow for the investment and progressing through each year of the project. You also have to include an initial "guess" for the possible IRR. The formula is: =IRR(values,guess) IRR Function IRR(F78..F83,.30) 39.2% CONCLUSION: Because the net present value of the proposal is positive, the new product is acceptable. A B C D E F G H I J K L M 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91
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