Question

East Ridge Company is considering a capital project that delivers a $50,000 annual net cash flow before tax. The investment will result in annual depreciation expense of $10,000 over the project's four-year useful life. Assuming a tax rate of 40%, what amount of annual after-tax net cash flow will be provided by this project? a. $40,000 b. $16,000 c. $24,000 d. $34,000

Answer 1

Annual after tax net cash flow = $34000

so correct option is d. $34,000

Step-by-step explanation:

given data

annual net cash flow = $50,000

annual depreciation expense = $10,000

tax rate = 40%

to find out

what amount of annual after tax net cash flow

solution

we find here Income Tax and here depreciation is non cash expense and t reduced from profits

Income Tax per annual = (Net Cash flows per annual - Depreciation) × Tax Rate ......................1

put here value

Income Tax per annual = ( $50,000 - $10,000 ) × 40%

Income Tax per annual = $16000

and

here Depreciation being a non cash expenditure not considered to arrive annual after tax net cash flow

Annual after tax net cash flow = Annual Net Cash flow before tax - Tax amount ......................2

put here value

Annual after tax net cash flow = $50000 - $16000

Annual after tax net cash flow = $34000

so correct option is d. $34,000