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31 December, 18:58

East Ridge Company is considering a capital project that delivers a $50,000 annual net cash flow before tax. The investment will result in annual depreciation expense of $10,000 over the project's four-year useful life. Assuming a tax rate of 40%, what amount of annual after-tax net cash flow will be provided by this project? a. $40,000 b. $16,000 c. $24,000 d. $34,000

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  1. 31 December, 20:20
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    Annual after tax net cash flow = $34000

    so correct option is d. $34,000

    Explanation:

    given data

    annual net cash flow = $50,000

    annual depreciation expense = $10,000

    tax rate = 40%

    to find out

    what amount of annual after tax net cash flow

    solution

    we find here Income Tax and here depreciation is non cash expense and t reduced from profits

    Income Tax per annual = (Net Cash flows per annual - Depreciation) * Tax Rate ... 1

    put here value

    Income Tax per annual = ($50,000 - $10,000) * 40%

    Income Tax per annual = $16000

    and

    here Depreciation being a non cash expenditure not considered to arrive annual after tax net cash flow

    Annual after tax net cash flow = Annual Net Cash flow before tax - Tax amount ... 2

    put here value

    Annual after tax net cash flow = $50000 - $16000

    Annual after tax net cash flow = $34000

    so correct option is d. $34,000
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