I got the answer, but I was wondering if someone could show me the calculation f
ID: 2635061 • Letter: I
Question
I got the answer, but I was wondering if someone could show me the calculation for it, ty!
A company buys tracking software for its warehouse which, along with the computer system and ancillaries to run it, will cost $1.6 million. This purchase will be deducted over five years. It is expected that the software will reduce inventory by $10.7 million at the end of the first year after it is installed, though there will be an annual cost of $120,000 per year to run the system. If the company's marginal tax rate is 40%, how will the purchase of this item change the company's free cash flows in the first year?
A) $10.756 million
B) $10.380 million
C) $9.680 million
D) $11.832 million
Explanation / Answer
inventory reducing = 10.7
aftertax annual cost = 0.12*(1-40%) = 0.072
depreciation tax shield = 1.6/5*40% = 0.128
free cash flows = inventory reducing - aftertax annual cost + depreciation tax shield = 10.7 - 0.072 + 0.128 = 10.756
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