Caribbean Corporation is considering the purchase of equipment for $360,000. The asset will have a 10- year life, no terminal salvage value, and straight- line depreciation will be used for tax purposes. It is expected that annual sales of the product manufactured by the equipment will be $180,000, and that there will be annual production costs, exclusive of depreciation, equal to
$120,000. The tax rate applicable to the company is 30%. The annual net after- tax cash effect of operations, exclusive of depreciation, is a(n):

Question

Quizplus · Accepted Answer

The annual net after-tax cash effect of operations is calculated as follows: Sales ($180,000) - Production Costs ($120,000) = $60,000. Tax on this amount is 30%, so $60,000 * 0.30 = $18,000. The after-tax cash flow is $60,000 - $18,000 = $42,000 inflow.

Caribbean Corporation Is Considering the Purchase of Equipment for $360,000