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15 July, 09:40

Coache Corporation is considering a capital budgeting project that would require an investment of $120,000 in equipment with a 4 year useful life and zero salvage value. The annual incremental sales would be $310,000 and the annual incremental cash operating expenses would be $230,000. In addition, there would be a one-time renovation expense in year 3 of $30,000. The company's income tax rate is 30%. The company uses straight-line depreciation on all equipment. The total cash flow net of income taxes in year 3 is:

a. $44,000

b. $35,000

c. $65,000

d. $50,000

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  1. 15 July, 10:11
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    a. $44,000

    Explanation:

    The computation of the total cash flow net of income taxes in year 3 is shown below:

    = Incremental sales - annual incremental cash operating expenses - one-time renovation expense - depreciation expense - income tax expense + depreciation expense

    = $310,000 - $230,000 - $30,000 - $30,000 - $6,000 + $30,000

    = $44,000

    Since depreciation is a non-cash expense so it would be added back to the computation part

    The depreciation expense would be

    = (Original cost - residual value) : (useful life)

    = ($120,000 - $0) : (4 years)

    = ($120,000) : (4 years)

    = $30,000

    And, the income tax expense would be

    = (Incremental sales - annual incremental cash operating expenses - one-time renovation expense - depreciation expense) * tax rate

    = ($310,000 - $230,000 - $30,000 - $30,000) * 30%

    = $20,000 * 30%

    = $6,000
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