Macadamia Company is considering an investment in equipment for $55,000. Chocolate uses the straight-line method of depreciation with no mid-year convention. In addition, its tax rate is 40 percent, and the life of the equipment is five years with no salvage value. The expected income before depreciation and taxes is projected to be $30,000 per year. What is the annual cash flow for Year 1?

Question

Quizplus · Accepted Answer

The annual depreciation expense is $55,000 / 5 = $11,000. The income before taxes after depreciation is $30,000 - $11,000 = $19,000. The tax on this income is $19,000 * 40% = $7,600. The net income after tax is $19,000 - $7,600 = $11,400. The annual cash flow is the net income after tax plus the depreciation expense, which is $11,400 + $11,000 = $22,400.

Macadamia Company Is Considering an Investment in Equipment for $55,000