Your construction firm is considering the purchase of a new paving machine for $55,000. This machine has an economic life of ten years with an expected salvage value of 12% of its first cost. Annual operating costs are expected to amount to $13,000 per year. Purchase of the paver will result in $29,000 additional revenue each year. The paver will be depreciated, for tax purposes, using double declining balance depreciation over a 5-year period.
The paver will be purchased by paying 25% down and making a 10%, 7-year, equal, annual payment loan. Use an after-tax minimum attractive rate of return equal to 12%, income tax rate equal to 46% as you work the following questions.
a) What is the present worth of the after-tax cash flow at time zero?
b) What is the present worth of the after-tax cash flow at the end of year five?
c) What is the present worth of the after-tax cash flow at the end of year seven?
d) What is the present worth of the after-tax cash flow at the end of year ten?
Discuss the influence of taxes on the results of the above analyses (i.e. how do taxes influence the before-tax cash flow compared to the after-tax cash flow results? How might this difference influence your decisions?)