Question

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___________

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