Question

The following information related to ABC plc. The company has been asked to compute the annual cash flows.
Machine
-Cost of machine_________________________________________ 200,000 birr
-Estimated life in years____________________________________ 4 years
-Estimated income_______________________________________ 15, 000 birr
-Estimated material cost___________________________________ 800 birr
-Estimated supervision cost_________________________________1,300 birr
-Estimated maintenance cost________________________________ 600 birr
-Estimated savings in wages_________________________________ 1000 birr
Additional information:-
Depreciation may be charged on straight line method.
The tax rate may be assume 50% and
Calculate annual cash flows.

Answer 1

To calculate the annual cash flows for ABC plc from the machine in question, we need to consider the following components: income, costs, depreciation, tax, and savings. Below are the steps broken down with calculations:

### Step 1: Calculate the Depreciation Expense
Using the straight-line method, depreciation can be calculated as follows:

\[
\text{Depreciation} = \frac{\text{Cost of Machine}}{\text{Estimated Life in Years}}
= \frac{200,000 \, \text{birr}}{4 \, \text{years}}
= 50,000 \, \text{birr/year}
\]

### Step 2: Calculate Total Costs
Total costs include material cost, supervision cost, maintenance cost, and the negative impact of savings in wages:

\[
\text{Total Costs} = \text{Material Cost} + \text{Supervision Cost} + \text{Maintenance Cost} - \text{Savings in Wages}
\]

Substituting values:

\[
\text{Total Costs} = 800 \, \text{birr} + 1,300 \, \text{birr} + 600 \, \text{birr} - 1,000 \, \text{birr}
= 700 \, \text{birr/year}
\]

### Step 3: Calculate Earnings Before Tax (EBT)
Now, calculate earnings before tax by considering the estimated income and subtracting total costs and depreciation:

\[
\text{EBT} = \text{Estimated Income} - \text{Total Costs} - \text{Depreciation}
\]

Substituting values:

\[
\text{EBT} = 15,000 \, \text{birr} - 700 \, \text{birr} - 50,000 \, \text{birr}
= -35,700 \, \text{birr}
\]

### Step 4: Calculate Taxes
Now, calculate the taxes based on the EBT. Since EBT is negative, there won’t be any tax:

\[
\text{Tax} = \text{Tax Rate} \times \text{EBT} = 0.50 \times -35,700 = 0 \, \text{birr}
\]

### Step 5: Calculate Net Income
Now we can compute the net income:

\[
\text{Net Income} = \text{EBT} - \text{Tax} = -35,700 \, \text{birr} - 0 \, \text{birr} = -35,700 \, \text{birr}
\]

### Step 6: Calculate Annual Cash Flows
Finally, to obtain the annual cash flows, we add back the depreciation (since it’s a non-cash expense):

\[
\text{Cash Flow} = \text{Net Income} + \text{Depreciation}
\]

This gives:

\[
\text{Cash Flow} = -35,700 \, \text{birr} + 50,000 \, \text{birr} = 14,300 \, \text{birr}
\]

### Annual Cash Flows Result:
So, the annual cash flow for ABC plc from the machine is:

\[
\text{Annual Cash Flow} = 14,300 \, \text{birr}
\]

### Summary of Results:
- **Depreciation:** 50,000 birr/year
- **Total Costs:** 700 birr/year
- **EBT:** -35,700 birr/year
- **Taxes:** 0 birr/year
- **Net Income:** -35,700 birr/year
- **Annual Cash Flows:** 14,300 birr/year

Thus, ABC plc would report an annual cash flow of 14,300 birr for the asset evaluated.