A company is considering the purchase of some equipment that in the second year of operation should cause an increase in sales of $150,000, an increase in cash expenses of $90,000, and a depreciation deduction of $45,000. If the appropriate tax rate is 40%, the after- tax effect of this equipment on cash flows in year two is:

Question

Quizplus · Accepted Answer

The after-tax cash flow is calculated as: (Increase in sales - Increase in cash expenses) * (1 - Tax rate) + Depreciation * Tax rate. This equals ($150,000 - $90,000) * (1 - 0.40) + $45,000 * 0.40 = $54,000.

A Company Is Considering the Purchase of Some Equipment That