James Corporation is considering the purchase of an asset for $400,000.It is expected that the product manufactured by the equipment can be sold for $150,000 and there will be annual production costs, exclusive of depreciation, equal to $80,000.The asset will have a 10-year life, no terminal salvage value, and straight-line depreciation will be used for tax purposes.The tax rate applicable to the company is 30%.The total net annual after-tax effect on cash resulting from the investment is a _____.

Question

Quizplus · Accepted Answer

Explanation: The net annual after-tax effect on cash flow can be calculated as follows: 1. Calculate the annual depreciation: $400,000 / 10 years = $40,000.2. Calculate the annual operating cash flow before taxes: $150,000 (revenue) - $80,000 (costs) = $70,000.3. Subtract the depreciation to find the taxable income: $70,000 - $40,000 = $30,000.4. Calculate the tax on the taxable income: $30,000 * 30% = $9,000.5. Calculate the after-tax income: $30,000 - $9,000 = $21,000.6. Add back the depreciation (since it's a non-cash expense) to find the net annual after-tax cash flow: $21,000 + $40,000 = $61,000.

James Corporation Is Considering the Purchase of an Asset for $400,000.It