Tucson Solar Company builds residential solar homes. Because of an anticipated increase in business volume, the company is considering the acquisition of a loader at a cost of $54,000. This acquisition cost includes delivery charges and applicable taxes. The firm has estimated that if the loader is acquired, the following additional revenues and operating expenses (excluding depreciation) should be expected:

The projected revenue is assumed to be in cash in the year indicated, and all the additional operating expenses are expected to be paid in the year in which they are incurred. The estimated salvage value for the loader at the end of the sixth year is $8,000. The firm€™s incremental (marginal) tax rate is 35%.
(a) What is the after€tax cash flow if the loader is acquired?
(b) What is the equivalent annual cash flow the firm can expect by owning and operating this loader at an interest rate of 12%?

Transcribed Image Text:

Additional Operating Expenses, Excluding Depreciation End of Additional Allowed Tax Depreciation Year Operating Revenue $66,000 $29,000 $10,800 $70,000 $28,400 $17,280 $74,000 $32,000 $10,368 3 $80,000 $38,800 $6,221 4 $64,000 $31,000 $6,221 $50,000 $25,000 $3,110 6.