Gable Company is considering the purchase of a new $80,000 delivery van.The van will have a useful life of 5 years, no terminal salvage value, and tax depreciation will be calculated using the straight-line method.If the van is purchased, the company will be able to increase annual revenues by $90,000 per year for the life of the van, but out-of-pocket expenses will also increase by $60,000 per year.Assume a tax rate of 20% and a required after-tax rate of return equal to 10%.The annual net after-tax cash effect of operations, exclusive of depreciation, is an) _____inflow.

Question

Quizplus · Accepted Answer

The annual net after-tax cash effect of operations, exclusive of depreciation, is an inflow of $24,480. This is calculated as follows:Increase in annual revenues: $90,000Increase in out-of-pocket expenses: $60,000Annual net after-tax cash effect of operations: $90,000 - $60,000 = $30,000Less: Taxes (20% x $30,000): $6,000Annual net after-tax cash effect of operations, exclusive of depreciation: $30,000 - $6,000 = $24,480

Gable Company Is Considering the Purchase of a New $80,000