Question

Pelican Cove Corporation is trying to decide whether to invest in equipment to manufacture a new product. If the investment project is accepted, sales revenue will increase by $65,000 per year and materials costs will increase by $16,000 per year. The equipment will cost $140,000 and is depreciable over 10 years using simplified straight line. The firm has a marginal tax rate of 34%. Calculate the firm's annual cash flows resulting from the new project. Group of answer choices

Answer 1

Answer:

The firm's annual cash flows resulting from the new project is $58,220

Explanation:

Increase in EBIT               $81,000

(65,000 + 16,000)

Less: Depreciation           $14,000

Profit before tax               $67,000  

Less: Tax at 34%              $22,780

Net income                       $44,220  

Add: Depreciation            $14,000

Operating cash flows     $58,220

Note: Depreciation = $140,000/10 years = $14,000