To open a new store, Jordan Tire Company plans to invest $392,000 in equipment e

Question

To open a new store, Jordan Tire Company plans to invest $392,000 in equipment expected to have a seven -year useful life and no salvage value. Jordan expects the new store to generate annual cash revenues of $316,000 and to incur annual cash operating expenses of $189,000. Jordan’s average income tax rate is 35 percent. The company uses straight-line depreciation.

Required

Determine the expected annual net cash flows from operations for each of the first four years after Jordan opens the new store.

Explanation / Answer

Determine the expected annual net cash flows from operations for each of the first four years after Jordan opens the new store.

Cash revenue 316000 Less: Cash expense -189000 Less: Depreciation (392000/7) -56000 Income before tax 71000 Less: Income tax (35%) -24850 Net income 46150 Add: Depreciation 56000 Expected Annual net cash flow 102150

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