Leamon Corporation is considering a capital budgeting project that would require

Question

Leamon Corporation is considering a capital budgeting project that would require an investment of $240,000 in equipment with a 4 year useful life and zero salvage value. The annual incremental sales would be $630,000 and the annual incremental cash operating expenses would be $480,000. In addition, there would be a onetime renovation expense in year 3 of $40,000. The company's income tax rate is 35%. The company uses straight-line depreciation on all equipment. The total cash flow net of income taxes in year 3 is: $92,500 $110,000 $78,500 $118,500

Explanation / Answer

Computation of cash flows net of income taxes in year 3 is

Depreciation =240000 / 4 = 60000

Sales 630000

expenses (480000)

rennovation expenses (40000)

EBDT 110000

depreciation (60000)

EBT 50000

Tax @35% (17500)

EAT 32500

depreciation 60000

Cash flows 92500

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