CLASSMATE POST 1:
1. Depreciation is charged by the Company, as it helps in reduction of income and subsequently sreduces the taxes of the Company, Depreciation is calculated as:
Calculate depreciation:
Depreciation = (400,000 – 50,000)/10
Depreciation = 35,000 every year
2. Calculate net income:
Net income is calculated after deducting expenses and depreciation from revenue
|
S.No |
Particulars |
Amount ($) |
|
1 |
Increase In Revenue |
330,000 |
|
2 |
Less: Expenses |
(165,000) |
|
3 |
Incremental Revenue |
165,000 |
|
4 |
Less: Depreciation |
(35,000) |
|
5 |
Net Cash Flows after Depreciation |
130,000 |
|
6 |
Less: Income Tax @ 60% |
(78,000) |
|
7 |
Anticipated Income |
52,000 |
Expenses are increasing by 165000 every year
Note:
Depreciation value is derived from calculation no-1
3. Calculate annual Net cash flows:
Annual net cash flows are the sum of the net income and depreciation as depreciation deducted is not paid to any one:
|
S. No |
Particulars |
Amount ($) |
|
1 |
Increase In Revenue |
330,000 |
|
2 |
Less: Expenses |
165,000 |
|
3 |
Incremental Revenue |
165,000 |
|
4 |
Less: Depreciation |
35,000 |
|
5 |
Net Cash Flows after Depreciation |
130,000 |
|
6 |
Less Income Tax @ 60% |
78,000 |
|
7 |
Anticipated Income |
52,000 |
|
8 |
Add: Depreciation |
35,000 |
CLASSMATE POST 2:
Problem 12-61, pg. 483
|
Cash cost of new equipment now |
Y400,000 |
|
Estimated life in years |
10 |
|
Terminal salvage value |
Y 50,000 |
|
Incremental revenues per year |
Y 330, 000 |
|
Incremental expenses per year other than depreciation |
Y 165,000 |
1. Depreciation expenses per year
Asset = Cash cost of new equipment – terminal salvage value
Y 400,000 – Y 50,000 = Y350,000
Depreciation expense per year = asset/terminal salvage value
Y 350,000/10yrs = Y35,000
2. Anticipated net income per year
Income before taxes = revenues – depreciation expense – incremental expenses
Y 330,000 – Y35,000 – Y 165,000 = 130,000
Income taxes = income taxes X flat rate
Y 130,000 X .6 = Y78,000
3. Annual net cash flow
Pretax cash inflow = revenues – incremental expenses
Y 330,000 – Y 165,000 = Y135,000
After-tax cash inflow = pretax cash inflow X (1 – tax rate)
Y 35,000 X .6 = Y 21,000
After-tax effect on cash = after-tax cash inflow + tax savings due to depreciation
Y54,000 + Y 21,000 = Y 75,000
4. Payback period
Payback period = initial incremental amount invested / annual incremental cash inflow
Y 400,000 / Y 54,000 = 7.40 years
5. ARR on initial investment
Y 75,000 – Y 35,000 / Y 400,000 = Y40,000 / Y400,000 = 0.10 or 10%
6. NPV
Y 75,000 X 10 X .14 –Y 35,000 = Y70,000
