Williams Company is considering the purchase of equipment for $360,000.The equipment will have a ten year life with no terminal salvage value.Straight-line depreciation will be used for tax purposes.It is expected that the equipment will generate annual sales of $180,000 and annual production costs,exclusive of depreciation,of $120,000.The tax rate is 40%.What is the annual after-tax cash flow from the depreciation expense?

Question

Quizplus · Accepted Answer

The annual depreciation expense is $36,000 ($360,000/10 years). The tax shield from depreciation is $36,000 * 40% = $14,400, which is the annual after-tax cash flow from the depreciation expense.

Williams Company Is Considering the Purchase of Equipment for $360,000