Zeon, a large profitable corporation, is considering adding some automatic equip

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 $123, 500. but the benefits are expected to decline $3,000 per year. The firm uses Straight-Line depreciation, a 4 year useful life and $22,000 salvage value. Assume that the equipment can be sold for its $22,000 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

Option 4

Depreciation is a non cash expense. Thus, in order to find the After Tax Cash Flow, we should add back the depreciation.

The formula for finding the after tax cash flow would be:

Taxable Income - Income Tax + Depreciation

Thus, for Year 1

54000 - 24840 + 69500 = $ 98660

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