Pilot Company will purchase a truck for $80,000.The truck's depreciable life is 5 years.The truck has no terminal salvage value.Assume a tax rate of 30% and a required after-tax rate of return of 12%.The company uses the straight-line method of depreciation for tax purposes.What is the annual after-tax cash flow from depreciation expense?

Question

Quizplus · Accepted Answer

The annual depreciation expense is $80,000 / 5 = $16,000. The tax shield from depreciation is $16,000 * 30% = $4,800. Since this reduces taxes paid, it is considered a cash inflow.

Pilot Company Will Purchase a Truck for $80,000