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

Question

Quizplus · Accepted Answer

The total cash flow net of income taxes in year 3 is $44,000. This is calculated as follows:Annual incremental sales: $310,000Annual incremental cash operating expenses: $230,000Depreciation expense: $120,000 / 4 = $30,000Income before taxes: $310,000 - $230,000 - $30,000 = $50,000Income taxes (30%): $50,000 x 0.30 = $15,000Net income: $50,000 - $15,000 = $35,000Add back depreciation expense: $30,000One-time renovation expense: $30,000Total cash flow net of income taxes: $35,000 + $30,000 + $30,000 = $44,000

Coache Corporation Is Considering a Capital Budgeting Project That Would