Dixie 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 net annual after-tax cash flow from the equipment?

Question

Quizplus · Accepted Answer

The net annual after-tax cash flow is calculated as follows: Annual sales ($180,000) - Annual production costs ($120,000) = $60,000. Depreciation expense is $360,000 / 10 years = $36,000. So, taxable income is $60,000 - $36,000 = $24,000. Taxes paid = 40% of $24,000 = $9,600. Therefore, net income after taxes = $24,000 - $9,600 = $14,400. The cash flow is net income after taxes plus depreciation = $14,400 + $36,000 = $50,400 cash inflow.

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