Meadville Corporation is considering a capital expenditure with the following estimated net cash inflows:
YearEstimated Pretax Inflation-Adjusted Net Cash Inflow
1 ...........................................$10,000
2 ........................................... 15,000
3 ........................................... 20,000
4 ........................................... 25,000
5 ........................................... 25,000
6 ........................................... 25,000
7 ........................................... 25,000
8 ........................................... 20,000
9 ........................................... 15,000
10 ........................................... 10,000
The equipment required for the project will have an initial cost of $100,000, and it is expected to have a salvage value at the end of the life of the project of $10,000. The equipment will be depreciated using the straight-line method over its economic life of 10 years for book purposes; however, it qualifies as 7-year property for tax purposes. The company's effective tax rate is 40%.
Required:
Determine the estimated after-tax net cash inflow for each of the project's 10 years, and compute the excess of total cash inflows over the original cost of the equipment. (Use the MACRS rates provided in Exhibit 22-4 to compute tax depreciation.