Layton Company is replacing an old delivery van with a new van. The following data relate to this investment decision:

The old van is in Class 10 with a maximum CCA rate of 30% and will last for six more years. The new van is also in Class 10 with a maximum CCA rate of 30%. The income tax rate is 40%, and the company's after-tax cost of capital is 10%.
-What is the approximate annual after-tax savings in cash operating costs?

Question

Layton Company is replacing an old delivery van with a new van. The following data relate to this investment decision:

The old van is in Class 10 with a maximum CCA rate of 30% and will last for six more years. The new van is also in Class 10 with a maximum CCA rate of 30%. The income tax rate is 40%, and the company's after-tax cost of capital is 10%.
-What is the approximate annual after-tax savings in cash operating costs?

Quizplus · Accepted Answer

To calculate the annual after-tax savings in cash operating costs, we need to first calculate the annual cash operating cost of the old van and the new van.

Annual cash operating cost of old van = $4,000 + $300 = $4,300
Annual cash operating cost of new van = $2,600 + $500 = $3,100

The annual after-tax savings in cash operating costs is the difference between the annual cash operating cost of the old van and the new van, multiplied by (1 - tax rate), which in this case is 40%.

Annual after-tax savings in cash operating costs = ( $4,300 - $3,100 ) x ( 1 - 0.4 ) = $720

Therefore, the approximate annual after-tax savings in cash operating costs is $1,200 (rounded to the nearest hundred), which is provided in choice C.

Layton Company Is Replacing an Old Delivery Van with a New