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Solution: Alternate Demo Problem Twenty-Five
1. First, calculate annual net cash flow:
Determine increase in after-tax net income:
Labor savings: 10,000 hours @ $5.50 per hour $55,000
Other operating savings 4,000
2. The rate of return on average investment equals the increase in net income after
tax divided by the amount of the average investment.
3(a) There is a cash savings of $59,000 each year for 10 years if income taxes are
ignored. The present value factor for a 10-year annuity at 10% is 6.1446.
Present value of cash savings ($59,000 x 6.1446) $362,531
3(b) There is a cash savings of only $43,400 each year for 10 years if income taxes are
considered.
Present value of cash savings ($43,400 x 6.1446) $266,676
Present value of investment 200,000
