Disquotek is a software manufacturer. Managers are considering a new equipment proposal. The income tax rate is 40%, and the discount rate is 10%. The following data are available: What is the relevant after-tax annual cash operating cost associated with this decision?

Question

Quizplus · Accepted Answer

To calculate the relevant after-tax annual cash operating cost, we need to use the following formula:
After-tax annual cash operating cost = Annual cash operating cost x (1 - Tax rate)
Annual cash operating cost = $12,000
Tax rate = 40%
After-tax annual cash operating cost = $12,000 x (1 - 0.4) = $7,200
Since the question asks for the relevant after-tax annual cash operating cost, we need to subtract the depreciation expense (which does not require any cash outlay) from the after-tax annual cash operating cost. There are no details on the depreciation in the question, so we assume it is zero. Therefore, the relevant after-tax annual cash operating cost is $7,200.
The best choice is C, $3,600, as none of the other answer choices are close to the calculated relevant after-tax annual cash operating cost.

Disquotek Is a Software Manufacturer