Question 1 0/5 pts Zeon, a large profitable corporation, is considering adding s

Question

Question 1 0/5 pts Zeon, a large profitable corporation, is considering adding some automatic equipment in its production facilities. An investment of $100,000 will produce an initial annual benefit of $41,500, but the benefits are expected to decline $2,000 per year. The firm uses SOYD depreciation, a 4 year useful life and $10,000 salvage value. Assume that the equipment can be sold for its $10,000 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. SOYD Depreciation Before-Tax Income Taxes After-Tax Taxable income at 46% Cash Flow 100,000 2,970 6,750 10,530 19,710 Year Cash Flow 100,000 41,500 39,500 37,500 45,500 0 36,000 27,000 18,000 9,000 5,500 12,500 19,500 36,500 2,530 5,750 8,970 16,790 2 4

Explanation / Answer

Option (1).

In year 4 (terminal year),

ATCF = (Before-tax cash flow + Salvage value - Depreciation) x (1 - Tax rate) + Depreciation.

In this case, Salvage value is not included from computation of ATCF.

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