Chocolate Company is considering an investment in equipment for $60,000.Chocolate uses the straight-line method of depreciation with no mid-year convention.In addition, its tax rate is 40 percent, and the life of the equipment is five years with no salvage value.The expected income before depreciation and taxes is projected to be $30,000 per year. What is the annual cash flow for Year 1?

Question

Quizplus · Accepted Answer

To calculate the annual cash flow for Year 1, we need to consider the following:

1. Depreciation: Since Chocolate uses the straight-line method of depreciation with no mid-year convention, the annual depreciation expense will be ($60,000 / 5) = $12,000.

2. Income before taxes: The income before depreciation and taxes is projected to be $30,000 per year.

3. Taxes: The tax rate is 40%, so the taxes payable will be ($30,000 - $12,000) x 0.4 = $7,200.

Therefore, the annual cash flow for Year 1 can be calculated as follows:

Cash flow = Income before taxes - Taxes + Depreciation
Cash flow = $30,000 - $7,200 + $12,000
Cash flow = $22,800

Hence, the best choice is C..

Chocolate Company Is Considering an Investment in Equipment for $60,000