Question

Coache Corporation is considering a capital budgeting project that would require an investment of $300,000 in equipment with a 4 year useful life and zero salvage value. The annual incremental sales would be $610,000 and the annual incremental cash operating expenses would be $420,000. In addition, there would be a one-time renovation expense in year 3 of $37,000. The company’s income tax rate is 30%. The company uses straight-line depreciation on all equipment.

The total cash flow net of income taxes in year 3 is:

Answer 1

	Equipment		$300,000
	Depreciation	$300000/4
	Depreciation	$        75,000
	Sales		$610,000
	Less:
	Operating Expenses	$420,000
	Depreciation	$75,000
	Renovation Expenses	$37,000
	Net Profit		$78,000
	Tax @ 30%		$23,400
	After Tax Profit	$54,600
	ADD:
	Depreciation	$75,000
	Total Cash Flow	$129,600