Consider Toyota’s purchase of the £125,000 machine analyzed in Exhibits 11.3 and 11.4. Suppose the machine had a useful life of 6 years, but the recovery period remains 5 years. What is the net present value of the investment?

Exhibit 11.3

Exhibit 11.4

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(S) (E) (D) Ee (S-E) (D) Traditional annual income statement Sales Less: Expenses, excluding depreciation Depreciation (straight-line) Total expenses Income before taxes Income taxes at 40% Net income Total after-tax effect on cash is either S-E-T= £130,000-£70,000-£14,000 = £46,000 or I + D= £21,000+ £25,000 = £46,000 Analysis of the same facts for capital budgeting Cash effects of operations: Cash inflow from operations: £130,000-£70,000 Income tax outflow at 40% After-tax inflow from operations (excluding depreciation) Cash effects of depreciation: Straight-line depreciation: £125,000÷5=£25,000 Income tax savings at 40% Total after-tax effect on cash £130,000 £ 70,000 25,000 £ 95,000 £ 35,000 14,000 € 21,000 € 60,000 £ 24,000 £ 36,000 10,000 £ 46,000