A project is expected to decrease a firm's cash expenses by $40,000 annually, and increase its depreciation by $25,000 annually. Given this information, what is the project's expected annual net cash flow? Use a 40% effective tax rate.
A)$31,000
B)$9,000
C)$16,000
D)$34,000

Question

Quizplus · Accepted Answer

The project's net cash flow is calculated by adding the tax shield from depreciation to the cash savings. The tax shield is $25,000 * 40% = $10,000. The cash savings is $40,000. Therefore, the net cash flow is $40,000 + $10,000 = $50,000. However, the increase in depreciation reduces taxable income by $25,000, saving $10,000 in taxes, so the net cash flow is $40,000 - ($25,000 * 40%) = $34,000.

A Project Is Expected to Decrease a Firm's Cash Expenses