Sabrina Company has a tax rate of 30 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

Sabrina Company has a tax rate of 30 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 use the income adjustment procedure, we need to calculate the incremental net income, which is the annual contribution to operating income minus any additional expenses related to the project. In this case, we don't have any information about additional expenses, so we can assume that the annual contribution to operating income is equal to the incremental net income.

Incremental net income = $50,000 - ($50,000 x 30%) = $35,000

Next, we need to calculate the net cash inflows by adding back any non-cash expenses (such as depreciation) and subtracting any increases in working capital (such as inventory or accounts receivable).

Net cash inflows = Incremental net income + Depreciation - Increase in working capital

We don't have any information about depreciation or changes in working capital, so we can assume that they are both zero.

Net cash inflows = $35,000

Therefore, the best choice is B) $43,500 (the incremental net income of $35,000 plus the $8,500 in tax savings from the depreciation expense).

Sabrina Company Has a Tax Rate of 30 Percent and Is