Donayre Corporation is considering a capital budgeting project that would require investing $160,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $450,000 and annual incremental cash operating expenses would be $320,000. The project would also require a one-time renovation cost of $70,000 in year 3. The company's income tax rate is 30% and its after-tax discount rate is 7%. The company uses straight-line depreciation. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The total cash flow net of income taxes in year 3 is:
A) $54,000
B) $42,000
C) $14,000
D) $103,000

Question

Quizplus · Accepted Answer

The correct answer is A. The total cash flow net of income taxes in year 3 is $54,000. This is calculated as follows:Incremental sales: $450,000Incremental cash operating expenses: $320,000Depreciation: $40,000 ($160,000 / 4)Renovation cost: $70,000Income before taxes: $60,000Income taxes (30%): $18,000Net income: $42,000Add back depreciation: $40,000Total cash flow net of income taxes: $54,000

Donayre Corporation Is Considering a Capital Budgeting Project That Would