Cpaaby2015
Jasper Company has a payback goal of 3 years on new equipment acquisitions. A new sorter is being evaluated that costs $450,000 and has a 5-year life. Straight-line depreciation will be used; no salvage is anticipated. Jasper is subject to a 40% income tax rate. To meet the company’s payback goal, the sorter must generate reductions in annual cash operating costs of
A. $150,000
B. $60,000
C. $100,000
D. $190,000
The answer sb D I think since,
The payback goal is 3 years: $450,000 / 3 years = $150,000 a year in Cash inflow is required; so calculate:
1. Depreciation tax affect: 450 / 5 years = $90,000 Dep year at the 40% tax rate = $36,000 ( annual cash affect or tax shield from depreciation).
The remaining cash inflow required is $114,000 a year: $150,000 – $36,000 = $114,000.
If the ‘Cash' Operating expenses need to decrease by another $114,000 a year with a tax bracket of 40%, the calc is $114,000 / (1 – tax-rate) or 114,000/.6 = $190,000.
In other words, if the company has expense reductions of $190,000 a year, the will get a tax increase of 190,000 * .4 = 76,000. So they need the $190,000 expense reduction to net the $114,000 cash inflow required.
.