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 $142,500, but the benefits are expected to decline $3,000 per year.  
The firm uses Straight-Line depreciation, a 4 year useful life and $45,000 salvage value.  
Assume that the equipment can be sold for its $45,000 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.

QUESTION 3 10 points Save 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 $142,500, but the benefits are expected to decline $3,000 per year The firm uses Straight-Line depreciation, a 4 year useful life and $45,000 salvage value Assume that the equipment can be sold for its $45,000 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 Income Taxes at 46% After-Tax Cash Flow -300,000 123,870 110,520 97,170 108,120 Straight-Line Depreciation Before-Tax Cash Flow 300,000 142,500 139,500 136,500 178,500 Year 0 Taxable Income 102,000 76,500 51,000 25,500 40,500 63,000 85,500 153,000 18,630 28,980 39,330 70,380 4 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 O It

Explanation / Answer

It is incorrect because the depreciation used is wrong

The before tax cash flows are correct and in the last year also the amount of equpment sold is included . Therefore the third option is not considerable.

The depreciation is on straight line basis

Depreciation = Equipment cost - salvage value / number of years

= 300000 - 45000 / 4

= 255000 / 4 = $ 63750

Therefore the depreciation used is not correct and it will effect after tax cash flows also simultaneously.

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