Question

XYZ Company is considering whether a project requiring the purchase of new equipment is worth investing. The cost of a new machine is $340,000 including shipping and installation. The project will increase annual revenues by $400,000 and annual costs by $100,000. The machine will be depreciated via straight-line depreciation for three years to a salvage value of $40,000. If the firm does this project, $30,000 in net working capital will be required. What is the annual cash flow of this project in the second year if the tax rate is 40%? Round to the nearest penny. Do not include a dollar sign in your answer.

Answer 1

Particulars	Amount
Sales	$           400,000
Costs	$          (100,000)
Depreciation	$          (100,000)
Income before tax	$           200,000
Less: taxes	$            (80,000)
Net income	$           120,000
Add: depreciation	$           100,000
Operating cash flow	$           220,000

Answer is:

220,000