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CA Final · Advanced Financial Management · Advanced Capital Budgeting Decisions

Anand Textiles Ltd is considering replacing a machine. Sales and cash costs are unchanged. The new machine will reduce annual cash operating costs by Rs 6,00,000. Incremental annual depreciation on the new machine over the old is Rs 2,00,000. The tax rate is 30%. What is the incremental annual after-tax cash flow?

The incremental annual after-tax cash flow is Rs 4,80,000. Cost savings of Rs 6,00,000 are taxed at 30%, leaving Rs 4,20,000, and the depreciation tax shield of Rs 60,000 is added.

  1. ARs 4,20,000
  2. BRs 4,80,000
  3. CRs 4,40,000Correct
  4. DRs 3,60,000

Explanation

Incremental profit before tax = 6,00,000 - 2,00,000 = 4,00,000. Tax at 30% = 1,20,000. Profit after tax = 2,80,000. Add back depreciation 2,00,000 = 4,80,000. Check: 6,00,000 x 0.7 + 2,00,000 x 0.3 = 4,20,000 + 60,000 = 4,80,000. The correct value is Rs 4,80,000, which is option B.

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