3.2 The following events are assumed to take place at time 1. Determine the cash flow for investment evaluation purposes. The tax rate is 0.35.
Credit sales $40,000
Cash sales 100,000
Out-of-pocket expenses 75,000
Income taxes 9,800 (reflects the $7,000 interest expense tax shield and the $30,000 depreciation)
Depreciation (accounting) 20,000
Depreciation (tax) 30,000
Change in net working capital (increase) 8,000 (includes $28,000 of accounts receivable that only costs $20,000 incrementally)
Interest expense 7,000
Principal payment 16,000
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