Disquotek, Inc., 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: $\begin{array}{lrc}
& \underline{\text { Old Equipment}}&
\underline{\text { New Equipment}}\
\text { Purchase cost } & \$ 12,000 & \$ 36,000 \
\text { Annual amortization } & 1,500 & 4,500 \
\text { Remaining useful life (years) } & 8 & 8 \
\text { Current selling price } & 14,400 & \text { not applicable } \
\text { Selling price in 8 years } & 1,000 & 2,000 \
\text { Annual operating costs } & 14,000 & 8,000
\end{array}$

What is the relevant after-tax annual cash operating cost associated with this decision?

Question

Disquotek, Inc., 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: $\begin{array}{lrc}
& \underline{\text { Old Equipment}}&
 \underline{\text { New Equipment}}\
 \text { Purchase cost } & \$ 12,000 & \$ 36,000 \
\text { Annual amortization } & 1,500 & 4,500 \
\text { Remaining useful life (years) } & 8 & 8 \
\text { Current selling price } & 14,400 & \text { not applicable } \
\text { Selling price in 8 years } & 1,000 & 2,000 \
\text { Annual operating costs } & 14,000 & 8,000
\end{array}$

What is the relevant after-tax annual cash operating cost associated with this decision?

Quizplus · Accepted Answer

The relevant after-tax annual cash operating cost can be calculated as follows:
Total annual operating cost = $20,000 + $2,500 + $3,500 = $26,000
Depreciation tax shield = $10,000 * 0.4 = $4,000
After-tax annual cash operating cost = Total annual operating cost - Depreciation tax shield = $26,000 - $4,000 = $22,000
Therefore, the relevant after-tax annual cash operating cost associated with this decision is $3,600 ($22,000 / 6 years).

Disquotek, Inc What Is the Relevant After-Tax Annual Cash Operating Cost Associated