Question

To open a new store, Linton Tire Company plans to invest $290,000 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 $319,000 and to incur annual cash operating expenses of $187,000. Linton’s average income tax rate is 35 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.)

Answer 1

Answer :

Cost of Investment = $290,000

Useful life = 5 years

Annual Depreciation = $290,000 / 5 years = $58,000

Revenue from new store before tax

= Cash revenue - Cash operating expenses - Annual Depreciation

= $319,000 - $187,000 - $58,000

= $74,000

Revenue from new store after tax = Revenue from new store before tax - Tax expense

= $74,000 - ($74,000 x 35%)

= $74,000 - $25,900

= $48,100

Expected annual net cash inflow from operations :

= Revenue from new store after tax + Annual Depreciation

= $48,100 + $58,000

= $106,100

Hence, Expected annual net cash inflow from operations for each of first 4 years is $106,100.