Williams Corporation is considering the purchase of equipment for $360,000.The asset will have a 10-year life, no terminal salvage value, and straight-line depreciation will be used for tax purposes.It is expected that annual sales of the product manufactured by the equipment will be $180,000, and that there will be annual production costs, exclusive of depreciation, equal to $120,000.The tax rate applicable to the company is 40%.The annual net after-tax cash effect of operations, exclusive of depreciation, is an) _____.

Question

Quizplus · Accepted Answer

To calculate the annual net after-tax cash effect of operations, we need to first calculate the annual depreciation expense. Since the equipment costs $360,000 with a 10-year life and no terminal salvage value, the annual depreciation expense will be $36,000 ($360,000/10).

Next, we can calculate the annual taxable income by subtracting the annual production costs and annual depreciation expense from the annual sales revenue:

$180,000 - ($120,000 + $36,000) = $24,000

Since the tax rate applicable to the company is 40%, the annual tax expense will be:

$24,000 x 0.4 = $9,600

Therefore, the annual net after-tax cash effect of operations is:

$180,000 - $120,000 - $36,000 - $9,600 = $14,400

However, since depreciation is a non-cash expense for tax purposes, we need to add back the annual depreciation expense to get the annual net after-tax cash effect of operations, exclusive of depreciation:

$14,400 + $36,000 = $50,400

Therefore, the correct answer is D, which is an inflow of $50,400.

Williams Corporation Is Considering the Purchase of Equipment for $360,000