Question

# After-Tax Cash Flows Warren Company plans to open a new repair service center for one of...

After-Tax Cash Flows

Warren Company plans to open a new repair service center for one of its electronic products. The center requires an investment in depreciable assets costing \$448,000. The assets will be depreciated on a straight-line basis, over four years, and have no expected salvage value. The annual income statement for the center is given below.

 Revenues \$400,000 Less: Cash operating expenses (160,000) Depreciation (112,000) Income before income taxes \$128,000 Less: Income taxes (@40%) 51,200 Net income \$76,800

Required:

1. Using the income approach, calculate the after-tax cash flows.
\$

2. Using the decomposition approach, calculate the after-tax cash flows for each item of the income statement and show that the total is the same as the income approach. Enter cash expenses as negative amounts and noncash expenses as positive amounts.

 Revenue (after tax) \$ Cash expenses (after tax) Depreciation tax savings Operating cash flow \$

3. What if it is desirable to express the decomposition approach in a spreadsheet format for the four years to facilitate the use of spreadsheet software packages? Express the decomposition approach in a spreadsheet format, with a column for each income item and a total column. Enter the after-tax cash expenses as negative amounts. Enter the after-tax revenues and the tax savings from noncash expenses as positive amounts.

 Year Revenue Cash operating expenses Noncash operating expenses Cash flow 1 \$ \$ \$ \$ 2 3 4

#### Homework Answers

Answer #1
 Particulars Amount (In \$) Net Income \$76,800 Add: Depreciation \$112,000 After tax cash flows \$188,800 Revenue (after Tax) (\$400,000 x (1-40%) ) \$240,000 Expenses (after tax) (\$160,000 x (1-40%) ) (\$96,000) Depreciation tax savings (\$112,000 x 40%) \$44,800 Operating Cash flow \$188,800 Year Revenue Cash Operating Expenses NonCash Operating Expenses Total 1 \$240,000 (\$96,000) \$44,800 \$188,800 2 \$240,000 (\$96,000) \$44,800 \$188,800 3 \$240,000 (\$96,000) \$44,800 \$188,800 4 \$240,000 (\$96,000) \$44,800 \$188,800
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