Use the table for the question(s)below.
-Consider the above statement of cash flows. In 2018, AOS Industries had contemplated buying a new warehouse for $2 million, the cost of which would be depreciated over 10 years. If AOS Industries has a tax rate of 25%, what would be the impact for the amount of cash held by AOS at the end of 2018?
A)It would have $150 000 less cash at the end of 2018.
B)It would have $2 000 000 less cash at the end of 2018.
C)It would have $1 950 000 less cash at the end of 2018.
D)It would have an additional $50 000 in cash at the end of 2018.

Question

Use the table for the question(s)below. 
-Consider the above statement of cash flows. In 2018, AOS Industries had contemplated buying a new warehouse for $2 million, the cost of which would be depreciated over 10 years. If AOS Industries has a tax rate of 25%, what would be the impact for the amount of cash held by AOS at the end of 2018?
A)It would have $150 000 less cash at the end of 2018. 
B)It would have $2 000 000 less cash at the end of 2018. 
C)It would have $1 950 000 less cash at the end of 2018. 
D)It would have an additional $50 000 in cash at the end of 2018.

Quizplus · Accepted Answer

If AOS Industries were to buy the new warehouse for $2 million, it would have to depreciate its value over 10 years. This means that the annual depreciation expense would be $200,000 ($2 million divided by 10 years). Since AOS has a tax rate of 25%, it would be able to reduce its taxable income by $200,000 and save $50,000 in taxes ($200,000 multiplied by 25%). Therefore, the impact on the amount of cash held by AOS at the end of 2018 would be $1,950,000 less.

Use the Table for the Question(s)below