A Company Is Considering the Purchase of Some Equipment That

Multiple Choice

A company is considering the purchase of some equipment that in the second year of operation should cause an increase in sales of $200,000, an increase in cash expenses of $120,000, and a depreciation deduction of $60,000. If the appropriate tax rate is 40 percent, what will be the after-tax effect of this equipment on cash flows in year two?

A) No effect
B) Net after-tax cash inflows will be $72,000.
C) Net after-tax cash inflows will be $12,000.
D) Net after-tax cash inflows will be $20,000.