Axios is a software manufacturer. Managers are considering a new equipment proposal. The income tax rate is 40%, and the discount rate is 10%. The following data are available: $\begin{array}{lcc}
&\underline{\text { Old Equipment}}& \underline{\text {New Equipment }}\
\text { Purchase cost } & \$ 12,000 & \$ 36,000 \
\text { Annual depreciation } & 1,500 & 4,500 \
\text { Remaining useful life (years) } & 8 & 8 \
\text { Current selling price } & 14,400 & \text { not applicable } \
\text { Selling price in 8 years } & 1,000 & 2,000 \
\text { Annual operating costs } & 14,000 & 8,000
\end{array}$
What is the relevant after-tax cash flow associated with disposing of the new equipment at its salvage value in 8 years?

Question

Axios is a software manufacturer. Managers are considering a new equipment proposal. The income tax rate is 40%, and the discount rate is 10%. The following data are available: $\begin{array}{lcc}
&\underline{\text { Old Equipment}}& \underline{\text {New Equipment }}\
\text { Purchase cost } & \$ 12,000 & \$ 36,000 \
\text { Annual depreciation } & 1,500 & 4,500 \
\text { Remaining useful life (years) } & 8 & 8 \
\text { Current selling price } & 14,400 & \text { not applicable } \
\text { Selling price in 8 years } & 1,000 & 2,000 \
\text { Annual operating costs } & 14,000 & 8,000
\end{array}$
 What is the relevant after-tax cash flow associated with disposing of the new equipment at its salvage value in 8 years?

Quizplus · Accepted Answer

The relevant after-tax cash flow from disposing of the new equipment at its salvage value in 8 years is calculated as follows: The salvage value of the new equipment in 8 years is $2,000. Since the income tax rate is 40%, the after-tax salvage value is $2,000 - 40% of $2,000 = $2,000 - $800 = $1,200.

Axios Is a Software Manufacturer What Is the Relevant After-Tax Cash Flow Associated with Disposing