Allen Company is considering a capital budgeting 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

To determine the project's annual net cash flows, we need to subtract the taxes paid on the earnings before taxes from the earnings before taxes and add back the annual depreciation.

Earnings before taxes: $100,000
Minus taxes (40% tax rate): $40,000
Net earnings after taxes: $60,000
Add back annual depreciation: $50,000

Annual net cash flows: $110,000

Allen Company Is Considering a Capital Budgeting Project That Is