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?
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?
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 $25,000 for
- What is the annual accounting income?
- What is the annual after-tax
cash flow ? - What is the payback based upon the initial
cash outflows ? - What is the discounted payback based upon the initial cash outflows?
Expert Solution
Step 1
1. Annual accounting income
| Amount($) | |
| 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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