A company makes an investment of $150,000 with a useful life of 10 years and expects to use this investment to generate $300,000 in sales with $280,000 in incremental operating costs. If the company operates in an environment with a 30% tax rate, what are the expected after-tax cash flows that the company will use to evaluate the capital investment decision? (Points: 10)
$9,500
$10,500
$16,500
$18,500
YO ITS D SON
To calculate the expected after-tax cash flows for the company's capital investment decision, there are a few key components we need to consider:
1. Revenue: The company expects to generate $300,000 in sales.
2. Incremental Operating Costs: The company expects operating costs of $280,000.
3. Tax Rate: The tax rate is 30%.
4. Useful Life: The investment has a useful life of 10 years.
To determine the before-tax cash flows, we subtract the operating costs from the revenue:
Before-tax cash flows = Revenue - Operating Costs
= $300,000 - $280,000
= $20,000
Next, we calculate the annual depreciation expense. Since the investment has a useful life of 10 years, the annual depreciation expense is:
Annual depreciation expense = Investment / Useful life
= $150,000 / 10
= $15,000
Now, we can calculate the taxable income by subtracting the depreciation expense from the before-tax cash flows:
Taxable income = Before-tax cash flows - Annual depreciation expense
= $20,000 - $15,000
= $5,000
The tax liability can be calculated by multiplying the taxable income by the tax rate:
Tax liability = Taxable income * Tax rate
= $5,000 * 0.30
= $1,500
Finally, to calculate the expected after-tax cash flows, we subtract the tax liability from the before-tax cash flows:
Expected after-tax cash flows = Before-tax cash flows - Tax liability
= $20,000 - $1,500
= $18,500
Therefore, the expected after-tax cash flows that the company will use to evaluate the capital investment decision is $18,500.
So the correct option is:
$18,500