You are considering investing in a piece of equipment to implement a cost-cutting proposal. The pre-tax cost reduction is expected to equal $41.67 for each of the three years of the project's life. The equipment has an initial cost of $125 and belongs in a 20% CCA class. Assume a 34% tax bracket, a discount rate of 15%, and a salvage value of zero.

What is the annual after-tax cost reduction for the project?

Question

What is the annual after-tax cost reduction for the project?

Quizplus · Accepted Answer

The annual after-tax cost reduction can be calculated by taking the pre-tax cost reduction and adjusting it for taxes. The pre-tax cost reduction is $41.67. To find the after-tax value, we subtract the tax effect from the pre-tax amount. The tax effect is 34% of $41.67, which is $14.17. Therefore, the after-tax cost reduction is $41.67 - $14.17 = $27.50. The depreciation and initial cost are not directly relevant to calculating the annual after-tax cost reduction from the cost savings perspective provided in the question.

You Are Considering Investing in a Piece of Equipment to Implement