Kade Corporation is considering the purchase of a new piece of equipment. The equipment will cost $135,000

Question:

Kade Corporation is considering the purchase of 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 will depreciate the cost of the asset for tax purposes using a five-year useful life, zero salvage value, 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.

Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Corporation
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