Granny\'s Butter and Egg Business is such that she pays an effective tax rate of
ID: 2739330 • Letter: G
Question
Granny's Butter and Egg Business is such that she pays an effective tax rate of 38%. Granny is considering the purchase of a new Turbo Churn for $25,000. The churn is a special handling device for food manufacture (MACRS 3-year Property) and has an estimated life of 4 years and a salvage value of $5000. The new churn is expected to increase net income by $7500 per year for each of the 4 years of use. Based on this information, what is the after-tax cash flow for this churn in the 4th year after purchase?
$8454 $5354 $6057 $8873Explanation / Answer
The correct answer is option A.
Increase in operating income = $7500
Add: Salvage value = $5000
Less: Depreciation = $25000*7.41% = 1852.5.
CAsh flow before tax = $10647.5.
Less tax @38% = 4046.05.
Cash flow after tax = $6601.45.
Add: Depreciation = 1852.5
Cash flows = 8453.95. or 8454.
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