To open a new store, Jordan Tire Company plans to invest $392,000 in equipment e

Question

To open a new store, Jordan Tire Company plans to invest $392,000 in equipment expected to have a seven -year useful life and no salvage value. Jordan expects the new store to generate annual cash revenues of $316,000 and to incur annual cash operating expenses of $189,000. Jordan’s average income tax rate is 35 percent. The company uses straight-line depreciation.

Required

Determine the expected annual net cash flows from operations for each of the first four years after Jordan opens the new store. (Negative amounts should be indicated by a minus sign.)

Explanation / Answer

Annual Depreciation Under Straight line method =392,000/7 =56000 Year 1 Year 2 Year 3 Year 4 Annual Cash Revenues 3,16,000 3,16,000      3,16,000      3,16,000 Less: Annual Cash Operating Expenses -1,89,000 -1,89,000    -1,89,000    -1,89,000 Annual Depreciation -56,000 -56,000        -56,000        -56,000 Total Expenses -2,45,000 -2,45,000    -2,45,000    -2,45,000 Net operating Income 71,000 71,000          71,000         71,000 Income Taxes @ 35% 24,850 24,850          24,850         24,850 Add back : Depreciation 56,000 56,000          56,000         56,000 Expected Annual net cash flows from Operations 80,850 80,850          80,850         80,850

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