Axios Is a Software Manufacturer What Is the Relevant After-Tax Annual Cash Operating Cost Associated

question 66

Multiple Choice

Axios is a software manufacturer. Managers are considering a new equipment proposal. The income tax rate is 40%, and the discount rate is 10%. The following data are available: $\begin{array}{lcc}&\underline{\text { Old Equipment}}& \underline{\text {New Equipment }}\\\text { Purchase cost } & \$ 12,000 & \$ 36,000 \\\text { Annual depreciation } & 1,500 & 4,500 \\\text { Remaining useful life (years) } & 8 & 8 \\\text { Current selling price } & 14,400 & \text { not applicable } \\\text { Selling price in 8 years } & 1,000 & 2,000 \\\text { Annual operating costs } & 14,000 & 8,000\end{array}$
What is the relevant after-tax annual cash operating cost associated with this decision?

• A) $2,400
• B) $8,000
• C) $6,000
• D) $3,600

---

Definitions:

Depreciated

The decrease in value of an asset over time, often due to wear, tear, or obsolescence.

Salvaged

Refers to assets that have been recovered, reused, or sold after being discarded or considered waste.

Tax Shield Approach

A financial strategy that utilizes deductible expenses, like interest, to reduce a company's taxable income, thereby lowering its tax liability.

Operating Cash Flow

The cash generated from a company's normal business operations, indicating its ability to generate positive cash flow.