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Company A is considering the purchase of a new piece of equipment which would cost $10,000...

Question

Company A is considering the purchase of a new piece of equipment which would cost $10,000...

Company A is considering the purchase of a new piece of equipment which would cost $10,000 with a 5 year useful life and have a salvage of $500 at the end of the 5 year period. Marginal tax rate is 30%, avg tax rate 20%. Assume straight line depreciation, the net effect of annual depreciation on the free cash flow is$___ in each of the 5 years.

Answers

PARTICULARS AMOUNT
A. Price 10000
B. Salvage value 500
C. Life 5
D. Depreciation (A-B)/C 1900
E. Marginal Tax Rate 30%

F. Effective Cash outflow savings

(D*E)

570


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