Compute the annual after tax cash flow

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Reference no: EM132823323

Question - TC Resources Ltd. is planning on reworking one of its old oil wells. This well was drilled and completed in 2012 and is in need of new oil well equipment. The old oil well equipment has a net book value of $2 million, a remaining usefullife pf 2 years (at which time it will have no salvage value), and a current salvage value of $500,000. The selling price of a barrel of oil is $50. The new equipment is expected to last for eight years and cost $12 million; one third immediate down payment and the balance due in two equal instalments due at the end of each of the next two years.

The following cash flows have been budgeted:

The annual additional maintenance costs on the new equipment will be $1.2 million.

Annual reduction in supervision salaries: $600,000

Annual savings in increased efficiencies: $500,000

The investment in working capital for the new equipment is $600,000.

At the end of its eight year life the new equipment is budgeted to have a salvage value of $2 million.

The new equipment will increase production by 44,000 barrels per year (one time increase of 44,000 per year).

After four years a major overhaul (costing $1.5 million) of the new equipment will be required. This will be treated for tax and accounting purposes as a capital addition. The overhaul has no effect on the salvage value.

REQUIRED -

1. Compute the annual after tax cash flow from the new equipment. Include any tax benefits related to the new equipment in the initial investment calculation.

2. Using your answer from #1 above, compute the net present value of the investment in the new equipment.

Reference no: EM132823323

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