An investment project is expected to generate earnings before taxes (EBT) of $60,000 per year. Annual depreciation from the project is $30,000, and the firm's tax rate is 40 percent. Determine the project's annual net cash flows.
A) $48,000
B) $66,000
C) $36,000
D) $52,000

Question

Quizplus · Accepted Answer

We can use the formula for net cash flow:

Net cash flow = EBT + Depreciation - Taxes

Substituting the given values:

Net cash flow = $60,000 + $30,000 - ($60,000 - $30,000) x 0.4
Net cash flow = $90,000 - $12,000
Net cash flow = $78,000

Therefore, the project's annual net cash flows are $78,000, which matches with option B.

An Investment Project Is Expected to Generate Earnings Before Taxes