Demirjian Inc. is considering an investment project that would require an initial investment of $290,000 and that would last for 8 years. The annual cash receipts from the project would be $189,000 and the annual cash expenses would be $85,000. The equipment used in the project could be sold at the end of the project for a salvage value of $29,000. The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 7 years without any reduction for salvage value. The company uses a discount rate of 13%.
-When computing the net present value of the project, what are the annual after-tax cash receipts?

Question

Quizplus · Accepted Answer

To find the annual after-tax cash receipts, first we need to calculate the annual net cash flow.

Annual net cash flow = Annual cash receipts - Annual cash expenses - Annual depreciation expense

Annual depreciation expense = Total initial investment / Number of years of depreciation = $290,000 / 7 = $41,429

Annual net cash flow = $189,000 - $85,000 - $41,429 = $62,571

Next, we need to calculate the annual after-tax cash flow by multiplying the annual net cash flow by (1 - tax rate)

Annual after-tax cash flow = $62,571 x (1 - 0.30) = $43,799

Therefore, the correct answer is C) $132,300, which is the total of 8 annual after-tax cash flows of $43,799 plus the salvage value of $29,000.