Question

To open a new store, Enid Tire Company plans to invest $320,000 in equipment expected to...

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.)

________________________________________________

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___________

Homework Answers

Answer #1

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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