To open a new store, Enid Tire Company plans to invest $320,000 in equipment expected to have a four-year useful life and no salvage value. Enid expects the new store to generate annual cash revenues of $400,000 and to incur annual cash operating expenses of $240,000. Enid’s average income tax rate is 30 percent. The company uses straight-line depreciation.
Required
Determine the expected annual net cash flows from operations for each of the first four years after Enid opens the new store. (Negative amounts should be indicated by a minus sign.)
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Year 1: Net Cash______ Year 1: Inflow/Outflow___________
Year 2: Net Cash______ Year 2: Inflow/Outflow___________
Year 3: Net Cash______ Year 3: Inflow/Outflow___________
Year 4: Net Cash______ Year 4: Inflow/Outflow___________
Data Given for Enid Tire Company:
Initial Cost of Equipment = $320000 |
Useful Life = 4 Years |
Annual Cash Revenue = $400000 |
Annual Operating Expense = $240000 |
Average Income Tax Rate = 30% |
Calculation for Net Inflow/(Outflow) :
Year | 1 | 2 | 3 | 4 | |
Revenue | 400000 | 400000 | 400000 | 400000 | |
Less : | Operating Expenses | 240000 | 240000 | 240000 | 240000 |
Depreciation | 80000 | 80000 | 80000 | 80000 | |
Net Income | 80000 | 80000 | 80000 | 80000 | |
Less : | Tax @ 30% | 24000 | 24000 | 24000 | 24000 |
Net Income after tax | 56000 | 56000 | 56000 | 56000 | |
Add : | Depreciation | 80000 | 80000 | 80000 | 80000 |
Net Cash Flow | 136000 | 136000 | 136000 | 136000 | |
Out Flow :Initial Cost of Equipment | -320000 | ||||
Net Inflow/(Outflow) | -184000 | 136000 | 136000 | 136000 |
Depreciation = (Original Cost-Salvage Value)/Useful Life = ($320000-0)/4 years = $80000
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