Niwot Inc.is considering an investment that will generate $600,000 in revenues per year for 7 years and has $360,000 of cash expenses for the same period (before income taxes).The cost of the asset is $420,000 and it will be depreciated using straight-line depreciation over the 7 year life.The asset has no salvage value.Niwot's tax rate is 30%.The cost of capital is 9%.
What is the annual after-tax cash flow associated with this investment?

Question

Quizplus · Accepted Answer

To calculate the annual after-tax cash flow, we need to subtract the taxes and depreciation from the revenues and expenses.

Revenues: $600,000
Expenses: $360,000
Depreciation: $60,000 ($420,000 cost / 7 years)
Taxable income: $180,000 ($600,000 - $360,000 - $60,000)
Taxes: $54,000 ($180,000 x 30%)
After-tax cash flow: $126,000 ($600,000 - $360,000 - $60,000 - $54,000)

Therefore, the annual after-tax cash flow associated with this investment is $126,000 (option C).

Niwot IncIs Considering an Investment That Will Generate $600,000 in Revenues