Elucidate how do taxes influence the before-tax cash flow

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Reference no: EM1360752

Your construction firm is considering the purchase of a new paving machine for $55,000. This machine has an economic life of ten years with an expected salvage value of 12% of its first cost. Annual operating costs are expected to amount to $13,000 per year. Purchase of the paver will result in $29,000 additional revenue each year. The paver will be depreciated, for tax purposes, using double declining balance depreciation over a 5-year period.

The paver will be purchased by paying 25% down and making a 10%, 7-year, equal, annual payment loan. Use an after-tax minimum attractive rate of return equal to 12%, income tax rate equal to 46% as you work the following questions.

a) What is the present worth of the after-tax cash flow at time zero?

b) What is the present worth of the after-tax cash flow at the end of year five?

c) What is the present worth of the after-tax cash flow at the end of year seven?

d) What is the present worth of the after-tax cash flow at the end of year ten?

Discuss the influence of taxes on the results of the above analyses (i.e. how do taxes influence the before-tax cash flow compared to the after-tax cash flow results? How might this difference influence your decisions?)

Reference no: EM1360752

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