A project is expected to increase a firm's sales revenue by $12,000 annually, decrease it cash expenses by $18,000 annually, and increase its depreciation by $10,000 annually. Given this information, what is the project's expected annual net cash flow? Use a 40% effective tax rate.
A)$400
B)$12,000
C)$22,000
D)$18,000

Question

Quizplus · Accepted Answer

Net cash flow can be calculated by subtracting the expected cash expenses from the expected sales revenue and adding the expected tax savings from the increased depreciation.

$12,000 (increase in sales revenue) - $18,000 (decrease in cash expenses) + ($10,000 x 0.4) (tax savings from increased depreciation)

= $22,000

Therefore, the expected annual net cash flow from the project is $22,000. Option C is the correct answer.

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