Depreciation and Tax Effects

A firm buys a machine for $100,000, which will be depreciated over 5 years using the straight-line method. The firm’s tax rate is 30%. The machine is expected to generate annual revenues of $50,000 and annual expenses of $20,000.

Requirements:

1. Calculate annual depreciation expense.
2. Determine annual taxable income.
3. Compute the annual tax savings due to depreciation.
4. Calculate the net cash flow for each year.