Globe Company will purchase a truck for $100,000.The truck's depreciable life is 5 years.The truck has no terminal salvage value.Assume a tax rate of 30% and a required after-tax rate of return of 12%.The company uses the straight-line method of depreciation for tax purposes.What is the annual after-tax cash flow from depreciation expense?

Question

Quizplus · Accepted Answer

The annual depreciation expense is $20,000 ($100,000/5 years). The tax shield from depreciation is $20,000 * 30% = $6,000. This results in a $6,000 cash inflow due to the tax savings.

Globe Company Will Purchase a Truck for $100,000