Reference no: EM132797303

Garcia Company is planning to purchase a piece of equipment that will reduce/save direct labor cost by $2.00 per unit of production. Jackson estimates that during the five year life of the equipment, production is estimated to be 30,000 units per year. Sales will not be impacted- the only pre-tax cash flow benefit of this equipment is its more efficient use of direct labor. The equipment will cost $100,000, have a useful life of 5 years, and will require cash fixed costs be incurred of $25,000 per year. If purchased, the equipment will be depreciated at the rate of $20,000 per year. No salvage value for the new equipment is anticipated, due to its customized nature. The tax rate the firm uses for this type of analysis is 40%.

Problem 1: Determine the annual after-tax cash flows (AATCF) for that Garcia should use to conduct a net present value analysis. Note you cannot compute a net present value (NPV) as you do not know the appropriate interest rate.

Option 1: $44,000

Option 2: $29,000

Option 3: $15,000

Option 4: $21,000