Zeon, a large profitable corporation, is considering adding some automatic equip
ID: 1177335 • Letter: Z
Question
Zeon, a large profitable corporation, is considering adding some automatic equipment in its production facilities. An investment of $300,000 will produce an initial annual benefit of $112,500, but the benefits are expected to decline $3,000 per year. The firm uses SOYD depreciation, a 4 year useful life and $43,000 salvage value. Assume that the equipment can be sold for its $43,000 salvage value at the end of 4 years. Also assume a 46% income tax rate for state and federal taxes combined. The following After-Tax Cash Flow Table has been prepared.Year Before-Tax Cash Flow SOYD Depreciation Taxable Income Income Taxes at 46% After-Tax Cash Flow 0 -300,000 -300,000 1 112,500 102,800 9,700 4,462 108,038 2 109,500 77,100 32,400 14,904 94,596 3 106,500 51,400 55,100 25,346 81,154 4 146,500 25,700 120,800 55,568 90,932 Is it correct? If not, why not? Answer It is correct. It is incorrect. Wrong depreciation used. It is incorrect. The money made when the equipment is sold in not included in the last year's cash flow. It is incorrect. The after-tax cash flow is wrong.Explanation / Answer
your are incorrect
correct answer is
depreciation = (300000 - 43000)/4 = 64250
cash flow is calculated first by decreasing depreciation from annual benefit then subtracting tax from it and then adding back the depreciation again
cash flow in 1st year = ( 112500 - 60750) * (0.54) + 60750 = 88695
in 2nd year annual benefit is decreased by 3000
cash flow in 2nd year = ( 109500 - 60750) * (0.54) + 60750 = 87075
similarly as above annual benefit is decreased each year by 3000 and same procedure is used to calculate remaining cash flow
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