A company is considering the purchase of some equipment that in the second year of operation should cause an increase in sales of $200,000, an increase in cash expenses of $120,000, and a depreciation deduction of $60,000. If the appropriate tax rate is 40 percent, what will be the after-tax effect of this equipment on cash flows in year two?
A) No effect
B) Net after-tax cash inflows will be $72,000.
C) Net after-tax cash inflows will be $12,000.
D) Net after-tax cash inflows will be $20,000.

Question

Quizplus · Accepted Answer

The after-tax effect on cash flows is calculated by considering the increase in sales, increase in expenses, and tax savings from depreciation. The net increase in income before tax is $200,000 - $120,000 = $80,000. The tax savings from depreciation is $60,000 * 40% = $24,000. The tax on the net income is $80,000 * 40% = $32,000. Therefore, the after-tax cash flow is $80,000 - $32,000 + $24,000 = $72,000.

A Company Is Considering the Purchase of Some Equipment That