Answer:
The firm's annual cash flows resulting from the new project is $58,220
Explanation:
The computation of the firm's annual cash flows is shown below:
1. Add : Sales revenue increased = $65,000 per year
2. Add: Material cost decreased = $16,000 per year
3. Profit before tax = Sales revenue + material cost
= $65,000 + $16,000
= $81,000
5. Less Tax @ 34% = Profit before tax × tax rate = $81,000 × 34% = $27,540
6. Net income = Profit before tax - tax rate = $81,000 - $27,540 = $53460
7. Add : depreciation rate = Depreciation × marginal rate
= $14,000 × 34% = $4,760
8. Annual cash flow = Net income + depreciation rate
= $53,460 + $4,760 = $58,220
where, depreciation is = (Purchase price - salvage value) ÷ Useful life
= ($140,000 - 0) ÷ 10
=$14,000
The depreciation is a non cash expense, so it is not affect the annual cash flow. That's why we don't considered depreciation in computation part.
Hence, the firm's annual cash flows resulting from the new project is $58,220
