Your company has to obtain some new production equipment to be used for the next ten years
Q4. Your company has to obtain some new production equipment to be used for the next ten years, and leasing is being considered. You have been directed to perform an after-tax study of the leasing approach. The data information for the study is as follows:
Lease cost: First year, $70,000; second year, $60,000; third through ten years, $50,000 per year.
Assume that a 10-year contract has been offered by the lessor that fixes these costs over the 10-year period. Other costs (outside the contract) are $3,000 per year. The effective income tax rate is 30%.
1- Develop the Annual After-tax Cash Flow (ATCF’s) for the leasing alternative.
2- If the Minimum Attractive Rate of Return (MARR) after taxes is 10%, what is the equivalant annual cost for the leasing alternative?
Hint
Management "Cash flow after taxes or CFAT is a measure of financial performance that looks at the company's ability to generate cash flow through its operations, and is calculated by adding back non-cash charges such as depreciation, amortization, restructuring costs, and impairment to net income. Cash Flow After Tax = Net income + depreciation + amortization...
"Cash flow after taxes or CFAT is a measure of financial performance that looks at the company's ability to generate cash flow through its operations, and is calculated by adding back non-cash charges such as depreciation, amortization, restructuring costs, and impairment to net income.
Cash Flow After Tax = Net income + depreciation + amortization + Other non-cash charges
The CFAT is also known as After-Tax Cash Flow.
The steps to calculate the annual after tax cash flow (ATCF)
i) Determine the cash flow before taxes.
ii) Subtract the income tax liability, state and federal.
And, the final result is the Cash Flow After Taxes."
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