A project is expected to increase a firm's sales revenue by $50,000 annually, increase it cash expenses by $20,000 annually, and increase its depreciation by $15,000 annually. Given this information, what is the project's expected annual net cash flow? Use a 40% effective tax rate.
A)$24,000
B)$9,000
C)$21,000
D)$33,000

Question

Quizplus · Accepted Answer

The project's expected annual net cash flow can be calculated as follows: Increase in sales revenue - Increase in cash expenses - Taxes on the additional profit (where additional profit = Increase in sales revenue - Increase in cash expenses - Increase in depreciation). Taxes on the additional profit = 40% of (50,000 - 20,000 - 15,000) = 40% of 15,000 = $6,000. Therefore, the net cash flow = 50,000 - 20,000 - 6,000 = $24,000.

A Project Is Expected to Increase a Firm's Sales Revenue