Charlotte Computer Services is considering purchasing equipment at $100 000. It is anticipated the equipment will have a useful life of five years. It will be depreciated on a straight-line basis. Operating revenue is expected to be $74 000 per annum and operating expenses $25 000 per annum. The equipment is subject to an investment allowance of 10 per cent and the tax rate is 30 per cent. The after-tax hurdle rate is 12 per cent. The reduction in tax due to the investment allowance is:

Question

Quizplus · Accepted Answer

The reduction in tax due to the investment allowance is calculated as the investment allowance (10% of $100,000 = $10,000) multiplied by the tax rate (30%). Therefore, $10,000 * 30% = $3,000.

Charlotte Computer Services Is Considering Purchasing Equipment at $100 000