To open a new store, Fanning Tire Company plans to invest $280,000 in equipment

Question

To open a new store, Fanning Tire Company plans to invest $280,000 in equipment expected to have a five -year useful life and no salvage value. Fanning expects the new store to generate annual cash revenues of $319,000 and to incur annual cash operating expenses of $192,000. Fanning’s average income tax rate is 30 percent. The company uses straight-line depreciation. Required Determine the expected annual net cash inflow from operations for each of the first four years after Fanning opens the new store

Explanation / Answer

Required Determine the expected annual net cash inflow from operations for each of the first four years after Fanning opens the new store

Annual cash revenue 319000 Less: Annual cash expenses (192000) Less: Depreciation (280000/5) (56000) Income before tax 71000 Less: Income tax (71000*30%) (21300) Net income 49700 Add: Depreciation 56000 Annual net cash inflow (each first four year) 105700

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