Arsenal Company is considering an investment in equipment costing $30,000 with a six-year life and no salvage value. Arsenal uses straight-line depreciation and is subject to a 35 percent tax rate. The expected net cash inflow before depreciation and taxes is projected to be $20,000 per year.
The Year 1 annual after-tax net cash inflow is:

Question

Quizplus · Accepted Answer

Multiply the annual cash inflow from the project of $20,000 by 1 - tax rate. $20,000 x 0.65 = $13,000. Add back the tax savings from depreciation [($30,000 / 6) x 0.35] of $1,750.
$13,000 + $1,750 = $14,750.

Arsenal Company Is Considering an Investment in Equipment Costing $30,000