Gonzalez Company is considering the purchase of equipment for $600,000.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 $400,000 and annual production costs,exclusive of depreciation,of $300,000.The tax rate is 40%.What is the net annual after-tax cash flow from the equipment?
A)$64,000 cash inflow
B)$72,000 cash inflow
C)$84,000 cash inflow
D)$96,000 cash inflow

Question

Quizplus · Accepted Answer

The net annual after-tax cash flow is calculated as follows: Annual sales ($400,000) - Annual production costs ($300,000) = $100,000. Depreciation is $600,000 / 10 = $60,000. Taxable income is $100,000 - $60,000 = $40,000. Taxes are 40% of $40,000 = $16,000. Net income is $40,000 - $16,000 = $24,000. Add back non-cash depreciation: $24,000 + $60,000 = $84,000.

Gonzalez Company Is Considering the Purchase of Equipment for $600,000