Zeon, a large profitable corporation, is considering adding some automatic equip
ID: 1227837 • Letter: Z
Question
Zeon, a large profitable corporation, is considering adding some automatic equipment in its production facilities. An investment of $400,000 will produce an initial annual benefit of $169,000. but the benefits are expected to decline $2,000 per year. The firm uses SOYD depreciation, a 4 year useful life and $21,000 salvage value. Assume that the equipment can be sold for its $21,000 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. Is it correct? If not, why not? 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
It is correct.
Formulae:
SOYD depreciation = Depreciation base * Remaining useful life/Sum of years digits
Taxable income = Before tax cash flow - Depreciation
Tax = Taxable income * 46%
After tax cash flow = Taxable income - Tax + Depreciation
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