In this type of question, we have to solve using the increment approach. The annual saving is the difference between the current year and the prior year. so for depreciation tax shield also we will take the difference between the two machineries.
Thank .
India.
Original Message:
Sent: 07-16-2021 08:15 AM
From: Khalafalla Khalafalla
Subject: Colvern Corporation is considering the acquisition of a new computer-aided machine tool to replace...
The annual cash flow from the investment is calculated as: Annual cash flow = (projected cash savings - change in depreciation^ - tax rate) + (change in depreciation Change in depreciation = new depreciation expense - old depreciation expense Change in depreciation = $16,000 - $1,600 = $14,400 Annual cash flow = ($28,400 - $14,400)(1 - 0.4) + ($14,400) Annual cash flow = $14,000(0.6) + $14,400 = $8,400 + $14,400 = $22,800.
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Khalafalla Khalafalla
Accountant
Kuwait
Kuwait
Original Message:
Sent: 10-22-2011 05:10 AM
From: Xiaohu Li
Subject: Colvern Corporation is considering the acquisition of a new computer-aided machine tool to replace...
Colvern Corporation is considering the acquisition of a new computer-aided machine tool
to replace an existing, outdated model. Relevant information includes the following.
Projected annual cash savings $28,400
Annual depreciation - new machine 16,000
Annual depreciation - old machine 1,600
Income tax rate 40%
Annual after-tax cash flows for the project would amount to
a. $5,600.
b. $7,440.
c. $17,040.
d. $22,800.
D is correct.
I think the calculation is 28400*60%+(16000-1600)*40%=22800.
but I don't understand why the depreciation tax shield is (16000-1600)*40% but not 16000*40%?
can someone give me explanation?