Veritas Ltd is considering investing in a new machine which costs $450 000. For accounting purposes this machine can be fully depreciated over 6 years; but for tax purposes, the machine can be fully depreciated over 5 years. The machine has no resale value. The annual cost savings resulting from the purpose of this machine is $100 000. Assume a tax rate of 30 per cent. The annual net cash flow is:

Question

Quizplus · Accepted Answer

The annual net cash flow can be calculated by considering the annual cost savings, depreciation, and tax effects. The annual depreciation for accounting purposes is $450,000 / 6 = $75,000. For tax purposes, it's $450,000 / 5 = $90,000. The tax savings from depreciation is ($90,000 - $75,000) * 30% = $4,500. Therefore, the annual net cash flow is the annual cost savings plus the tax savings, which is $100,000 + $4,500 = $104,500. However, the depreciation for tax purposes reduces the taxable income, leading to tax savings on the cost savings as well. The tax on the cost savings is $100,000 * 30% = $30,000. So, the after-tax savings is $100,000 - $30,000 = $70,000. Adding the tax savings from depreciation, the total net cash flow is $70,000 + $4,500 = $74,500. The mistake in calculation led to an incorrect conclusion. The correct approach to calculate the annual net cash flow should consider the after-tax savings directly from the operational savings, which is $100,000 * (1 - 0.30) = $70,000, without adding the tax savings from depreciation difference, as it's already accounted for in the reduced taxable income. Therefore, none of the provided options accurately reflect the correct calculation based on the given explanation. The correct annual net cash flow should be directly derived from the operational savings after tax, which is not explicitly provided in the options.

Veritas Ltd Is Considering Investing in a New Machine Which