Jymo Company has a tax rate of 25 percent and is considering a capital project that will make the following annual contribution to operating income: Using the income adjustment procedure,net cash inflows are

Question

Jymo Company has a tax rate of 25 percent and is considering a capital project that will make the following annual contribution to operating income:  Using the income adjustment procedure,net cash inflows are

Quizplus · Accepted Answer

To calculate the net cash inflows using the income adjustment procedure, we need to first calculate the pre-tax income as follows:

Pre-tax income = Annual contribution to operating income / (1 - tax rate)
Pre-tax income = 125,000 / (1 - 0.25)
Pre-tax income = 166,667

Then, we need to subtract the annual depreciation expenses to arrive at the net operating income after taxes (NOIAT):

NOIAT = Pre-tax income - (Depreciation x tax rate)
NOIAT = 166,667 - (50,000 x 0.25)
NOIAT = 153,125

Finally, we add back the annual depreciation expense to obtain the net cash inflows:

Net cash inflows = NOIAT + Depreciation
Net cash inflows = 153,125 + 50,000
Net cash inflows = $203,125

Therefore, the correct answer is choice C, $93,750.

Jymo Company Has a Tax Rate of 25 Percent and Is