Fort Wayne Corporation expects the following revenues, cash expenses, and deprec

Question

Fort Wayne Corporation expects the following revenues, cash expenses, and depreciation charges as a result of its recent opening of an affiliated store in Lansing:

Fort Wayne is in the 40 percent tax bracket. Please compute the after-tax cash flows for year 1 and year 5 from this investment in the Lansing store.

Select one:

a. $6,000 for year 1, $10,800 for year 5

b. 0 for year 1, $18,600 for year 5

c. $15,600 for year 1, $18,600 for year 5

d. $5,900 for year 1, $16,200 for year 5

Year 1 2 3 4 5 Revenues $16,000 $20,000 $38,000 $48,000 $35,000 Cash Expenses 8,000 5,000 14,000 19,000 19,000 Depreciation 3,000 4,000 3,000 3,000 3,000

Explanation / Answer

Answer is option (a). $6,000 for year 1, $10,800 for year 5

Explanation;

After-tax cash flows for year 1 and year 5 will be calculated as follow;

Year 1

Year 5

Revenues

$16000

$35000

Less: Cash expenses

($8000)

($19000)

Less Depreciation

($3000)

($3000)

Income before tax

$5000

$13000

Less: Tax @ 40%

($2000)

($5200)

Income after tax

$3000

$7800

Add: Depreciation

$3000

$3000

After tax cash flows

$6000

$10800

Year 1

Year 5

Revenues

$16000

$35000

Less: Cash expenses

($8000)

($19000)

Less Depreciation

($3000)

($3000)

Income before tax

$5000

$13000

Less: Tax @ 40%

($2000)

($5200)

Income after tax

$3000

$7800

Add: Depreciation

$3000

$3000

After tax cash flows

$6000

$10800

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