Question

Badlands Outdoor Adventures Inc. has a proposed operating efficiency project (technology) that will NOT impact revenues, but will save operating expenses of $55,000 per year, excluding depreciation expenses. The total depreciable cost of the project is $400,000 and the company will depreciate the asset using 8 year straight line depreciation (equal amounts) to a zero basis. Assume that Badlands marginal tax rate is 44 percent, what is the annual incremental after tax cash flow of this project?

(Hint: Because the depreciation expense is the same each year, the incremental operating cash flow will be the same for every year.)

A. $49,280

B. $13,000

C. $42,000

D. $52,800

Answer 1

Annual depreciation = Cost / number of periods

Annual depreciation =,400,000 / 8

Annual depreciation = $50,000

Incremental after tax cash flow = (Savings - depreciation)(1 - tax) + depreciation

Incremental after tax cash flow = (55,000 - 50,000)(1 - 0.44) + 50,000

Incremental after tax cash flow = 2,800 + 50,000

Incremental after tax cash flow = $52,800