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.)

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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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