After-Tax Cash Flows

Below is a list of aspects of various capital expenditure proposals that the capital budgeting team of Anchor, Inc., has incorporated into its net present value analyses during the past year. Unless otherwise noted, the items listed are unrelated to each other. All situations assume a 40% income tax rate and an 11% minimum desired rate of return.

1. Pre-tax savings of $4,000 in cash expenses will occur in each of the next three years.

2. A machine is purchased now for $43,000 cash.

3. A long-haul tractor costing $33,000 will be depreciated $11,000, $14,600, $4,900, and $2,500, respectively, on the tax return over four years.

4. Equipment costing $210,000 will be depreciated over five years on the tax return in the following amounts: $26,250 $52,500 $52,500 $52,500 and $26,250.

5. Pre-tax savings of $9,800 in cash expenses will occur in each of the next six years.

6. Pre-tax savings of $8,000 in cash expenses will occur in the first, third, and fifth years from now.

7. The tractor described in aspect 3 will be sold after four years for $6,000 cash.

8. The equipment described in aspect 4 will be sold after four years for $21,000 cash.

a. Calculate and record in column A the related after-tax cash flow effect(s).

b. Indicate in column B the timing of each cash flow shown in column A. Use 0 to indicate immediately and 1, 2, 3, 4, and so on for each year involved.

The answer to investment aspect 1 is presented as an example.

Use negative signs with answers that are cash outflows.

Under Column B, select the appropriate year for the timing of each cash flow using the drop down menu.

A B

Investment

Aspect After-tax Inflows/ (Outflows) Year(s) of

Cash Flow Effect(s) Cash Flow

1 $ 2,400 1

2,400 2

2,400 3

2

4

5

6

7

8