Tank Ltd is considering undertaking the purchase of a new piece of equipment that is expected to increase pre-tax income(EBITDA) by $7,000 each year for the next 5 years.
It costs $25,000 to purchase today and for tax purposes must be depreciated down zero over its 8 year useful life using the straight-line method.
If Tank is actually forecasting a salvage (for capital budgeting purposes) of $8,000 after 5 years, what is the machine's net cash flow (after tax) for year 5? Assume the tax rate is 30%.
NB: EBITDA is "Earnings Before Interest, Taxes, Depreciation and Amortisation"