Allen Company is considering an investment project that is expected to generate $100,000 in annual earnings before taxes. Annual depreciation will be $50,000. Allen's marginal tax rate is 40%. Determine the project's annual net cash flows.
A) $150,000
B) $110,000
C) $90,000
D) $60,000

Question

Quizplus · Accepted Answer

First, we need to calculate the earnings after taxes: 
Earnings Before Taxes (EBT) = $100,000 
Depreciation = $50,000 
Taxable income = EBT - depreciation = $50,000 
Taxes = Taxable income x Marginal tax rate = $50,000 x 0.4 = $20,000 
Earnings After Taxes (EAT) = EBT - Taxes = $100,000 - $20,000 = $80,000

Next, we need to calculate the annual net cash flow: 
Net Cash Flow = EAT + Depreciation = $80,000 + $50,000 = $130,000

Therefore, the correct choice is B.

Allen Company Is Considering an Investment Project That Is Expected