Sunset Company is considering the purchase of equipment for $400,000.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 $200,000 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 $40,000 ($400,000/10 years). The tax shield from depreciation is $40,000 * 40% = $16,000, which is the annual after-tax cash flow from the depreciation expense.

Sunset Company Is Considering the Purchase of Equipment for $400,000