Task: Income Tax Effects
Kade Corporation is considering purchasing a new piece of equipment. The equipment will
cost $135,000 and is expected to have a useful life of five years. The gross cash flow savings is estimated to be $50,000 per year. The company elects not to take the expense deduction and will depreciate the full cost of the asset for tax purposes under MACRS using a 5-year recovery period and the straight-line method. The company is in the 40% tax bracket (including federal, state, and local taxes).
1. Compute the after-tax cash flow savings on the asset.
2. Compute the after-tax internal rate of return that will equate the present value of the savings with the net outlay cost.