A company bought a machine for $20,000. The machinehas a useful life of 5 years and a salvage value of $4,000. The machine can bringa net saving of $6,000/year. Assume straight-line depreciation is usedand a flat tax rate of 34%. Interest rate is 10%. What is the after-tax B/C ratio of this machine?

B-C Ratio= 1.09

Explanation:

Initial Cost=C=$20,000

Salvage =S=$4000

Useful life=n=5 years

Depreciation per year=D=(C-S)/n

                                        =(20000-4000)/5

                                        =$3200

Year     (a)                  (b)             c=(a)-(b)        (d)             (e )=(a)-(d)

          Before    Depreciation    Taxable      Income        After tax

         Tax Cash                           income     Tax at 34%  cash flow

         flow

0       -20000                                                                        -20000

1         6000            3200             2800             952             5048

2        6000            3200             2800             952             5048

3        6000            3200             2800             952             5048

4        6000            3200             2800             952             5048

5        6000            3200            2800             952              5048

5       4000                                                                             4000

Combine cash flow for 5 years:

        10000             3200           2800             952            9048

Special care is taken to consider the after tax flow for resale/salvage. We assume that machine is sold for defined salvage value. So, it is not subjected to tax. So, I have shown it seperately. Combined cash flow flows are also indicated in the table.

PV of regular cash inflows=PV(B)

                                           =5048*(P/A,0.10,5)

                                           =5048*3.790787

                                           =19135.89

PV of salvage=PV(M)=4000*(P/F,0.10,5)

                       =4000*0.620921

                      =$2483.68

Interest factors are calculated as;

(P/F,0.10,5)=1/(1+0.10)^5

                  =0.620921

(P/A,i,n) = [1-1/(1+i)^n]/i

             = [ 1 -1/(1+0.10)^5]/0.10

              = 3.790787

B-C Ratio=PV(B)/[C-PV(M)]

               =19135.89/(20000-2483.68)

               =1.09

answer; charters;