Sharpie Company will purchase a van for $75,000.The van's depreciable life is 5 years.The van has no terminal salvage value.Assume a tax rate of 30% and a required after-tax rate of return of 12%.The company uses the straight-line method of depreciation for tax purposes.What is the annual after-tax cash flow from depreciation expense?

Question

Quizplus · Accepted Answer

The annual depreciation expense is $75,000 / 5 = $15,000. The tax shield from depreciation is $15,000 * 30% = $4,500. This results in an annual after-tax cash inflow of $4,500 due to the tax savings from depreciation.

Sharpie Company Will Purchase a Van for $75,000