A profitable company pays $100,000 wages and has depreciation expense of $100,000. The company's income tax rate, t, is 40%. The after-tax cash flows from these two items are calculated as follows:
A) An after-tax cash outflow of $40,000 for wages, and a cash inflow of $60,000 for depreciation expense.
B) An after-tax cash outflow of $40,000 for wages, and a cash inflow of $40,000 for depreciation expense.
C) An after-tax cash outflow of $60,000 for wages, and a cash inflow of $60,000 for depreciation expense.
D) An after-tax cash outflow of $60,000 for wages, and a cash inflow of $40,000 for depreciation expense.
E) An after-tax cash outflow of $40,000 for wages, and a cash inflow of $100,000 for depreciation expense.

Question

Quizplus · Accepted Answer

Wages are a cash outflow, and the after-tax amount is $100,000 * (1 - 0.4) = $60,000. Depreciation is a non-cash expense, but it reduces taxable income, resulting in a tax saving of $100,000 * 0.4 = $40,000.

A Profitable Company Pays $100,000 Wages and Has Depreciation Expense