Forever Company has a tax rate of 40% and a required rate of return of 10%.Depreciation expense relating to operating equipment is $100,000 per year.What is the after-tax cash flow from the annual depreciation expense?

Question

Quizplus · Accepted Answer

Depreciation is a non-cash expense, but it provides a tax shield. The tax shield is the depreciation expense multiplied by the tax rate: $100,000 * 40% = $40,000. This results in a $40,000 cash inflow due to the reduction in taxes.

Forever Company Has a Tax Rate of 40% and a Required