NML plc is considering buying a new machine costing £200,000 which would generate the following before-tax cash flows from the sale of goods produced.

 

NML pays corporation tax of 19 per cent per year one year in arrears and claims capital allowances on a 18 per cent reducing balance basis. The machine would be sold after four years for £20,000. If NML’s after-tax cost of capital is 10 per cent, is the purchase of the machine financially acceptable?

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Year 1 2 3 4 Before-tax cash flow £65,000 £70,000 £75,000 £98,000