Question

To open a new store, Linton Tire Company plans to invest $295,000 in equipment expected to have a five-year useful life and no salvage value. Linton expects the new store to generate annual cash revenues of $322,000 and to incur annual cash operating expenses of $188,000. Linton's average income tax rate is 40 percent. The company uses straight-line depreciation. Required Determine the expected annual net cash inflow / outflow from operations for each of the first four years after Linton opens the new store. (Negative amounts should be indicated by a minus sign.) Net cash Inflow / Outflow Year 1 Year 2 Year 3 Year 4

Answer 1

Year	Annual cash revenue	Annual cash Operating exp.	Depreciation (($295,000-$0)/5)	Net income	Tax	Net Income after tax(Net Income- Tax)	Purchase price paid	Depreciation	Net Cash(Net Income after tax- Purchase price+Depreciation)	Inflow/ Outflow
1	$322,000	$188,000	$59,000	$75,000	40%	$45,000	$295,000	$59,000	$191,000	Outflow
2	$322,000	$188,000	$59,000	$75,000	40%	$45,000	-	$59,000	$104,000	Inflow
3	$322,000	$188,000	$59,000	$75,000	40%	$45,000	-	$59,000	$104,000	Inflow
4	$322,000	$188,000	$59,000	$75,000	40%	$45,000	-	$59,000	$104,000	Inflow

Net Cash	Inflow/ Outflow
$191,000	Outflow
$104,000	Inflow
$104,000	Inflow
$104,000	Inflow

Note: Depreciation is added back to net cash because no cash is paid for it.