Matt Helm 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 that 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 Matt Helm Corporation is 30%. If the equipment is purchased, the total net after- tax effect on cash flows over the entire life of the investment is:

Question

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The net cash inflow is calculated as follows: Annual revenue ($150,000) minus annual costs ($80,000) gives $70,000. Depreciation is $40,000 per year ($400,000/10 years). Taxable income is $30,000 ($70,000 - $40,000), and tax is $9,000 (30% of $30,000). Net income is $21,000 ($30,000 - $9,000). Add back depreciation ($40,000) to get annual cash flow of $61,000. Over 10 years, this is $610,000. Subtract the initial investment of $400,000 to get a net inflow of $210,000.

Matt Helm Corporation Is Considering the Purchase of an Asset