Answered: The Bird Co. is considering a 7-year…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Problem 1

The Bird Co. is considering a 7-year project that would require a cash outlay of $160,000 for machinery and an additional $25,000 for working capital that would be released at the end of the project. The equipment would be depreciated evenly over the 7 years and have a salvage value of $10,000 at the end of 7 years. The project would generate before tax annual cash inflows of $50,000. The tax rate is 21% and the company's discount rate is 14%.

What is the annual accounting income?
What is the annual after-tax cash flow?
What is the payback based upon the initial cash outflows?
What is the discounted payback based upon the initial cash outflows?

Expert Solution

Step 1

1. Annual accounting income

	Amount($)
before tax annual cash inflows	50,000
less: depreciation	21,429
Taxable income	28,571
Less: Tax@21% (28,571 x 21%)	6,000
Net income / accounting income	22,571

Depreciation =160,000 - 10,000 / 7 years =$21,429

2.Annual after-tax cash flow

	Amount($)
A-before tax annual cash inflows	50,000
B-less: depreciation	21,429
C-Taxable income	28,571
D-Less: Tax@21% (28,571 x 21%)	6,000
E-After tax cash flow (A-D)	44,000

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