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A company projects an increase in net income of $40,000 each year for the next five years if it invests $500,000 in new equipment.The equipment has a five-year life and an estimated salvage value of $50,000.The company uses the straight-line method of depreciation.
-What is the net annual cash flow?

Question

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A company projects an increase in net income of $40,000 each year for the next five years if it invests $500,000 in new equipment.The equipment has a five-year life and an estimated salvage value of $50,000.The company uses the straight-line method of depreciation.
-What is the net annual cash flow?

Quizplus · Accepted Answer

The net annual cash flow is calculated by adding the net income to the annual depreciation expense. The annual depreciation expense is calculated as (Initial Cost - Salvage Value) / Useful Life = ($500,000 - $50,000) / 5 = $90,000. Therefore, the net annual cash flow is Net Income + Depreciation Expense = $40,000 + $90,000 = $130,000.

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