Badlands Outdoor Adventures Inc. has a proposed operating efficiency project (te

Question

Badlands Outdoor Adventures Inc. has a proposed operating efficiency project (technology) that will NOT impact revenues, but will save operating expenses of $55,000 per year, excluding depreciation expenses. The total depreciable cost of the project is $420,000 and the company will depreciate the asset using 10 year straight line depreciation (equal amounts) to a zero basis. Assume that Badlands marginal tax rate is 44 percent, what is the annual incremental after tax cash flow of this project?

(Hint: Because the depreciation expense is the same each year, the incremental operating cash flow will be the same for every year.)

A. $49,280

D. $51,580

A. $49,280

Explanation / Answer

Cost savings $        55,000 Less: Depreciation $        42,000 420000/10 Profit before tax $        13,000 Less: Tax @ 44% $          5,720 Net income $          7,280 Add: Depreciation $        42,000 Cash flows $        49,280

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