Houze Corporation has provided the following information concerning a capital budgeting project: The working capital would be required immediately and would be released for use elsewhere at the end of the project. The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The total cash flow net of income taxes in year 3 is:

Question

Houze Corporation has provided the following information concerning a capital budgeting project:  The working capital would be required immediately and would be released for use elsewhere at the end of the project. The company uses straight-line depreciation on all equipment. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.The total cash flow net of income taxes in year 3 is:

Quizplus · Accepted Answer

To calculate the total cash flow net of income taxes in year 3, we need to calculate the following:

1. Initial Investment: -$400,000
2. Year 1 Cash Flow: $170,000 + $50,000 - $90,000 - $20,000 = $110,000
3. Year 2 Cash Flow: $170,000 + $50,000 - $90,000 - $20,000 = $110,000
4. Year 3 Cash Flow: $170,000 + $50,000 - $90,000 - $20,000 = $110,000 + $10,000 tax shield (given) = $120,000
5. Salvage Value: $60,000

Total Cash Flow = Initial Investment + Year 1 Cash Flow + Year 2 Cash Flow + Year 3 Cash Flow + Salvage Value
Total Cash Flow = -$400,000 + $110,000 + $110,000 + $120,000 + $60,000
Total Cash Flow = $-400,000 + $500,000
Total Cash Flow = $100,000

Therefore, the total cash flow net of income taxes in year 3 is $47,000 (option C).

Houze Corporation Has Provided the Following Information Concerning a Capital