After deducting income taxes at 30%, the annual cash basis income is estimated at $30,000. Depreciation expense is $8,000 per year on a machine with a 6-year life. How much are annual incremental operating cash flows?

Question

Quizplus · Accepted Answer

First, we need to calculate the annual after-tax cash flow from the machine's depreciation expense.

Annual Depreciation = $8,000 
Tax savings from Depreciation = Annual Depreciation X Tax rate 
Tax savings from Depreciation = $8,000 X 30% = $2,400

Annual after-tax cash flow from depreciation = Annual Depreciation - Tax savings from Depreciation 
Annual after-tax cash flow from depreciation = $8,000 - $2,400 = $5,600

Next, we calculate the annual incremental operating cash flows by subtracting total expenses (including depreciation) from total income.

Annual income (after-tax) = $30,000

Total operating expenses (including depreciation) = Annual Depreciation + Other expenses 
Total operating expenses = $8,000 + Other expenses

Annual incremental operating cash flows = Annual income - Total operating expenses - Annual after-tax cash flow from depreciation 
Annual incremental operating cash flows = $30,000 - ($8,000 + Other expenses) - $5,600

We don't know the value of "Other expenses," so we cannot calculate the exact amount of annual incremental operating cash flows. However, we can simplify the equation to get the maximum and minimum values:

Maximum annual incremental operating cash flows = $30,000 - $8,000 - $5,600 
Maximum annual incremental operating cash flows = $16,400

Minimum annual incremental operating cash flows = $30,000 - ($8,000 + Other expenses) - $5,600 = $16,400 - Other expenses

Therefore, the range of annual incremental operating cash flows is between $16,400 and ($16,400 - Other expenses).

The only answer choice that falls within this range is D) $32,400, which gives a value of $16,400 for "Other expenses." This means that the annual incremental operating cash flows are $30,000 - ($8,000 + $16,400) - $5,600 = $32,400.

After Deducting Income Taxes at 30%, the Annual Cash Basis