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 $200,000 in equipment with a 4 year useful life and zero salvage value. The annual incremental sales would be $640,000 and the annual incremental cash operating expenses would be $510,000. In addition, there would be a one-time renovation expense in year 3 of $27,000. 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:

Explanation / Answer

Year Cash outflow Incremental sale Depreciation Inc. Cash operating expenses Renovation Expenses Total cash Flow Tax@35% Total Cash flow Depreciation Netcash flow 0 -200000 -200000 0 -200000 -200000 1 640000 -50000 -510000 80000 28000 52000 50000 102000 2 640000 -50000 -510000 80000 28000 52000 50000 102000 3 640000 -50000 -510000 -27000 53000 18550 34450 50000 84450 4 640000 -50000 -510000 80000 28000 52000 50000 102000 Net cash flow 190450

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