Bond 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

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The net annual after-tax cash flow is calculated as follows: Revenue ($150,000) - Costs ($80,000) = $70,000. Depreciation is $400,000 / 10 = $40,000. Taxable income is $70,000 - $40,000 = $30,000. Taxes are $30,000 * 30% = $9,000. Net income is $30,000 - $9,000 = $21,000. Add back depreciation (a non-cash expense) to net income: $21,000 + $40,000 = $61,000 inflow.

Bond Corporation Is Considering the Purchase of an Asset for $400,000